Martin Wolf Goes Soft on Bowles-Simpson

The normally astute Martin Wolf failed to do his homework for a column yesterday in which he described the deficit reduction plan put forward by Morgan Stanley director Erskine Bowles and former Senator Alan Simpson as "the only politically realistic long-term fiscal solution."

Actually there is a much politically viable solution: do nothing. Yes, this will make the deficit hawks at the Washington Post and other such places yell and scream, but it is both politically viable and economically solid. Unlike Bowles-Simpson, the do-nothing plan would not further slow the economy. (Remember, Bowles-Simpson as originally designed would have begun deficit reduction on October 1, 2011.) The do-nothing plan is obviously politically viable since it is currently what we are doing, more or less. (We'll have to see how the end of 2012 issues get resolved.)

The economic reality is that we face no urgency to do anything on the deficit. We will undoubtedly need some additional revenues over the longer term, in addition to reversing the Bush tax cuts for the richest 2 percent, but it is possible that other better solutions will become politically viable, for example a Wall Street speculation tax that would hit big banks like the one where Mr. Bowles serves as a director. (It's funny how they never considered taxing Wall Street.)

It's also possible that we will fix the health care system so it doesn't take an absurdly large share of GDP. That would require that folks like the insurers, drug companies and doctors take a hit, but it is principle possible that we could see enough political pressure in the future that this tiny elite is forced to take the hit rather than tens of millions of seniors living on $20,000 a year.

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written by jamzo, August 18, 2012 8:25

Bowles and Simpson and their plan has not shown any political traction in this session of congress

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written by skeptonomist, August 18, 2012 9:14

Actually, if Republicans take control of the federal government in 2012 it is very likely that the only thing that will be done is to reduce tax rates. Concern about deficits is just political posturing and the self-described Republican "deficit hawks" will change their tune when they get power and the media will go along - deficits will not be a major issue. Cutting Medicare or SS would be very unlikely since they are popular programs (Medicaid would probably be cut). We don't need to speculate about what will happen in a Republican administration, since we know what was done in the Reagan, Bush I and Bush II administrations. These policies are certainly politically viable, unless there is a crash as in 2008.

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written by skeptonomist, August 18, 2012 9:25

Would Republicans repeal "Obamacare"? This will probably depend on how profitable it is for the health-care and insurance industries, which is not completely certain yet since most provisions do not go into effect until 2014. Republicans could make sufficient changes to insure that profits are not reduced, if necessary. The opposition to Obamacare (a plan originally proposed by conservatives) is again political posturing, in accordance with the fiction that Obama is a dangerous socialist. This is a tactic to appeal to tea-partiers and racists, not people who are seriously concerned with economic matters.

What Romney/Ryan claim they will do and what they would actually do are two different things; it's too bad that so much attention is devoted to their vaporous claims and not to actual probably actions.

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written by Jerry, August 18, 2012 10:33

Both candidates are essentially putting forth the same budget, as Jeff Sachs discussed on FT a couple days back. Obama's first course of action is to implement austerity, and doing nothing is not really an option with automatic bush tax cuts and sequestration. I would anticipate something along the lines of the near agreement from last year, if anything it would be further to the right: http://www.nytimes.com/2012/04...nted=all#7

"They had agreed to reduce discretionary spending — meaning both the defense budget and money used to finance the rest of the government — by about $1.2 trillion over 10 years; it would be up to Congress to figure out how. They also agreed to a list of programs from which they could cut at least $200 billion more in the coming decade. These included an estimated $44 billion from pensions for civilian and military employees of the government; $30 billion from Fannie Mae and Freddie Mac; $33 billion from farm subsidies and conservation programs; and $16 billion from reforming the Postal Service.

On entitlements too they had moved closer to a final deal. The White House agreed to cut at least $250 billion from Medicare in the next 10 years and another $800 billion in the decade after that, in part by raising the eligibility age. The administration had endorsed another $110 billion or so in cuts to Medicaid and other health care programs, with $250 billion more in the second decade. And in a move certain to provoke rebellion in the Democratic ranks, Obama was willing to apply a new, less generous formula for calculating Social Security benefits, which would start in 2015."

In a word, we are screwed. Unless there is some sort of massive social movement a la Occupy to stop this from happening.

Isn't the health care bubble bigger than the housing bubble?
written by wkj, August 18, 2012 3:06

"It's also possible that we will fix the health care system so it doesn't take an absurdly large share of GDP."

I agree that the fix would solve a lot of problems, but couldn't it also create some new ones, especially if the fix took place over a short period of time?

You often remind us that we are still living with consequences of the housing bubble. Couldn't a deflation of the health care bubble, meaning lower compensation for doctors, lower profits (& stock prices) for drug companies, hospitals & medical equipment companies, etc. create a comparable dislocation?

Just sayin'.

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written by Jerry, August 18, 2012 6:01

wkj,

I've wondered the same thing many times. What you're saying is certainly true, but I think the fix would probably come gradually anyway. The best way seems to be a state-by-state basis like Vermont is currently doing, since health care is really run at the state level anyways with insurers and the big hospitals. As some states start to see success, then others will want to try their method, not unlike marijuana legalization (hopefully won't take nearly as long though).

There is some consolation however that, despite throwing people out of work in the health insurance industry, reform will put a lot of money back into the pockets of consumers all over the country, who can then spend that money elsewhere in the economy. So it is not like the housing or dot-com bubble where a bunch of balance sheet wealth will just vanish, the money will be redistributed and used for other purposes.

Martin Wolf Goes Soft on Bowles-Simpson

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