Some Early Thoughts on the Fiscal Commission Draft Proposal

by: Wall St. Cheat Sheet

By Elliot Turner

It’s turning out to be a macro-intensive week for my morning column. Yesterday the bi-partisan Fiscal Commission released a rough draft of its highly anticipated proposal to tackle the concern over growing government deficits. In these days of heightened partisanship, the talking heads on both sides are already attacking the report. With a task of this magnitude and a topic this touchy, just about everyone is setup for disappointment. It’s so damn easy to be disappointed when you want to be and that’s the attitude with which many on both sides of the partisan divide have approached this matter.

A chart of the proposal vs. our present path.

(Click to enlarge)

As always, I like to take a slightly different view. I know that it’s impossible to like each and every point in a report that covers such a widespread array of topics, therefore in my first run through the report I specifically looked for elements that I like, ideas that make sense, and prevailing principles that I deem essential components of any sound, long-term plan. Let’s start with some of the broad principles and then move down to some specifics.

The approach of the Fiscal Commission in commencing the deficit cuts starting with the fiscal year 2012 makes perfect sense. We are at a point in our economic recovery where UNDERTAKING austerity right now does more harm than good. That doesn’t mean that THINKING about restoring balance in the not-too-distant future shouldn’t be done right now. To me, this was one of the most important elements to look for in how the report was structured. It requires time and patience. These are some principles that should allow both sides of the aisle to find some common ground from which to begin this monumental task.

I particularly like the gradual outline of the plan. This is a process, and as such, we simply cannot wake up one day with balance. Moreover, as time moves on we gain more certainty about where we are, both in the metaphysical sense and economic sense. Things change fast. It’s not unreasonable to think that our budget outlook might improve due to some unknown that we have not yet contemplated (after all, we still are the most innovative country in the world, let’s not sell ourselves short here!).

And as for innovation, it was great to see that the Proposal would maintain and aim to increase allocations to “education, infrastructure, and high-value R&D.” These elements are the foundation upon which we built our innovative society and in order to improve our advantage in this domain, we need the government’s ability to contribute capital to these essential areas.

I like the cap on spending as a % of GDP, not because I think a cap is necessary, but because it provides a framework within which policy makers can work. By that I mean it makes things far easier for certainty in terms of planning the budget. Plus, the Proposal incorporates the necessary flexibility to “Allow Congress and the President to waive the requirements during years with low economic growth, unanticipated military conflict, or major disaster.” Without this exemption such a cap on spending would be disastrous and unnecessary. All that being said, I am interested in how exactly the Proposal would construct such a waiver. What would constitute low economic growth? How exactly do we define a “military conflict” considering we don’t declare wars in this day and age? These are important questions that remain unanswered.

Those of you who have been long-time readers know about my disdain for the subsidies received by fossil fuel industries and agriculture. Such subsidies are not only outdated in terms of their necessity, but do more harm than good in today’s economic landscape. They are a natural starting point for spending cuts, and including them in this Proposal should help individual Congressmen make a choice that is both necessary, but unpopular with some core constituencies. Such is the reality of making hard choices. Plus, there is a slight increase to the tax on gasoline which will fund transportation spending and perhaps more importantly, further incentivize the use of more energy efficient technology.

An interesting element of the report is the restructuring of the tax code. This is something that makes a whole lot of sense, considering how chaotic the code actually is. If only they did this before I had to take Tax Law 101 in law school. I mean seriously, memorizing elements of our tax code is not only boring, it’s needlessly complex. Of particular note is the ending of the mortgage interest deduction. Never did I expect to see that there, but honestly, I think it’s great. Not only is it a smart way to save money, but it also sends the right message. At its essence, economics is about incentives and allowing for the mortgage interest deduction provides the wrong incentive. It rewards debt as opposed to equity and this preference is one particular catalyst that directly contributed to our present financial crisis.

Social Security will perhaps be the most hotly debated component of the Proposal. Ultimately, the conclusion of the report seems fairly balanced in that it increases the benefits for minimum wage workers to “above the poverty threshold” and indexing it to inflation, while also raising the retirement age to 68 in a very slow and orderly fashion. For all those up in arms over the retirement edge, that change doesn’t take place until 2050 and there is ample time to digest such a change.

All in all, the bi-partisan nature of this report should help Congressmen on both sides of the aisle make difficult choices while passing on the blame. Isn’t that what politics is all about today? There are elements that both sides will love and both will hate, and that’s exactly what is needed for a good plan to restore balance. Most important, the Proposal is smart in its long-term vision for undertaking this long-term task. Again, it’s a process.

Disclosure: None