New Simpson-Bowles plan: how it envisions a sustainable fiscal path for US

The oracles of bipartisan debt and deficit reduction have yet another plan to get Washington on a sustainable fiscal path for the next decade and beyond.

Former White House Chief of Staff Erskine Bowles, a Democrat, and former Sen. Alan Simpson (R) of Wyoming, the co-chairs of President Obama’s 2010 debt commission, laid out that plan Tuesday morning. Their proposals would pare back federal health-care spending, raise government revenue through reducing "tax preferences," and institute a mix of other cuts and policy changes that would, among other things, supplant the “sequester” – $85 billion in automatic spending reductions that are set to hit beginning March 1.

Both men savaged the concept of the sequester at a breakfast Tuesday hosted by Politico. “Stupid, stupid, stupid,” Mr. Bowles said. “There’s no business in the country that makes its cuts across the board.”

Instead, the duo said, the negotiations between House Speaker John Boehner (R) and Mr. Obama in the run-up to the “fiscal cliff” nearly netted the type of wide-ranging accord they favor. And their own measure would finish the job, they said.

“If these guys were this close back in December, then we’ll pick it up from there and try to move it along,” Mr. Simpson said. “It’s not Simpson-Bowles or Bowles-Simpson – it’s do something.”

What to do? Some $2.4 trillion in deficit reduction is needed to get America’s debt trending downward by 2023, they argued – and that follows, they said, lawmakers already achieving up to $2.7 trillion in deficit reduction over the past two years. Specific changes to entitlement programs must be included this time around, the pair urged in their ever-calm and folksy style.

Obama, by contrast, urged $1.5 trillion in further deficit reduction in a statement Tuesday.

To break down their proposal: Half of the deficit reduction over the next 10 years would come from $600 billion in lower health-care spending and $600 billion in new revenue from tax reform.

The health-care reductions would be more than double what the president endorsed in Medicare changes during his State of the Union message. But the Simpson-Bowles proposal is broader, proposing to reform the nation’s tort laws, reduce payments to health-care providers, and require wealthier Americans to pay more for federal health programs.

In an outline of their plan, the pair also endorsed a long-term cap on government health-care spending, which would limit growth in health outlays to the growth of the economy by 2018.

As for the other end of things, tax reform, it “will irritate everyone in the US,” Simpson said.

Various tax preferences – deductions and credits – got into the tax code by dint of heavy lobbying, Simpson noted. Defenders of such preferences would move against any changes fiercely (even thought the vast majority of tax preferences would stay in place).

Of course, accomplishing the other changes wouldn’t be easy, either. Democrats are under pressure from labor unions and other groups to give no ground on social support programs. AFL-CIO head Richard Trumka, a longtime adversary of Simpson and Bowles, said in a statement that the two men's most recent proposal was again telling working people to "drop dead."

And there's plenty of resistance on the right to the new Simpson-Bowles framework, as Republicans vow that a simplification of the tax code should be done without raising taxes – and that any other way to raise government revenue is out of the question.

Bowles and Simpson would accomplish the rest of the reductions – some $1.2 trillion – in several ways. A slower-growing measure of inflation for indexing government spending and tax brackets (known as chained CPI) would garner some $300 billion in savings over the next decade. More than $300 billion in savings would come from lower interest payments on the debt. Further discretionary spending cuts would also be needed, as well as changes to mandatory payments including farm subsidies and federal retirement benefits, among other things.

In the document outlining their approach, the men also said a fiscal deal should end the need to raise the national debt ceiling – an approach used by Republicans as leverage to win spending concessions from the Obama administration. As it stands now, the government will need to raise the debt ceiling again sometime this summer.

“Once policymakers enact a comprehensive deficit reduction plan that keeps the debt on a clear downward trajectory – and continues to do so – they should index the debt limit in order to avoid the need for future political fights over raising it,” according to the plan outline.

Time and again, however, the two emphasized that hitting a deficit reduction target a decade hence is a good but insufficient mark of success. Instead, making changes to programs like Social Security (which the men said should be tackled in an independent process in the next year) and Medicare would put the government on a path to fiscal solvency.

Without such changes, Bowles warned, international capital markets could exact a painful price through higher interest rates on US debt. Returning to prerecession interest levels could triple interest expenditures to $600 billion, he warned, requiring the sort of bitter austerity seen in some European nations slammed by debt crises.

“Nobody knows when the tipping point will come, but everybody will know it when it hits us,” Bowles said. “Today, we’re the best-looking horse in the glue factory.”