5/3/13 – A Very Funny and Depressing Hour with Simpson and Bowles

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 3, 2013 8:27:53 AM

and tagged Politics and the Economy

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I’ve been at the Goldman Sachs investor conference yesterday and today, listening to and learning from a group of very smart people. Among the smartest were Alan Simpson and Erskine Bowles, the cochairs of the commission that brought us the Simpson-Bowles (or Bowles-Simpson) budget plan. Unexpectedly, they were also the funniest, which, given their dire message, was a relief.

At Commonwealth’s National Conference last year, I gave a fairly detailed presentation on the budget problems we faced, noting that I believed any solution would eventually converge to something close to the Simpson-Bowles plan.

So far, we’re not there. In fact, the original Simpson-Bowles plan has been superseded by events, but its creators are continuing the fight. Their website (www.fixthedebt.org) contains a new plan, along with plenty of educational material for citizens who want to understand what’s going on.

Both Simpson and Bowles deserve a great deal of credit for staying the course and, in a real bipartisan effort, telling hard truths to their respective sides. (Simpson is a Republican and former Wyoming senator, and Bowles is a Democrat and former chief of staff in the Clinton administration.) They say they get hate mail, and I believe them. They could both easily just retire and step back.

Why don’t they? To paraphrase Mr. Bowles, when they first agreed to chair the commission, they thought they were working for their grandkids. Then it was their kids. Finally, they realized they were working to save themselves. They believe the problem is that immediate.

Some of the points that came up yesterday:

  • One hundred percent of the revenue raised last year went for mandatory spending (entitlements) and interest on the debt.
    • So 100 percent of spending on what most people think of as the government was borrowed.
    • That’s 40 cents of each dollar we spend.
  • The major problems we face are entitlements, defense, health care, and the tax code.
  • Taxes have to go up, and spending has to be cut.

None of this is particularly new, and everyone more or less knows what has to happen. The problem is getting there.

Simpson and Bowles were frankly discouraging in their estimate of whether our present political structure could solve the problem, giving a 20 percent–25 percent chance of a grand bargain. The problem should be solvable, and, per their plan, it is—particularly in terms of reforming the tax code. They claim that 80 percent of the tax code is used by only 20 percent of the population. The only way to force a solution, however, seems to be for a crisis to hit.

On the other hand, based on information they provided, perhaps Simpson and Bowles have reason to be a bit more optimistic. They say they have a bipartisan group of 48 senators and 160 members of the House who have signed on so far. Not enough, but getting there. They have 600,000 signatures on their web petition. Again, getting there. Finally, the crisis they mention may materialize, as we have several pending deadlines that will force some sort of action.

Others take a different view, acknowledging we have a problem but maintaining that it’s neither so immediate nor so dire. Abby Joseph Cohen, president of Goldman’s Global Markets Institute, noted this morning that the current deficit is improving and expected to continue to do so; it’s currently around where it was during the Reagan administration and only slightly above that of the Bush years. The real deficit problem, she states, will come in around 2020.

Listening to Bowles and Simpson, it seems to me that they plan to continue working until we do solve the problems. That kind of determination and bipartisan leadership is exactly what we need. The sense of urgency they project is also necessary to make something happen. Even if Cohen is correct, and we have more running room than Bowles and Simpson think, they’re absolutely right to keep pressing.

Thank you, gentlemen.

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