A Dose of Reality for Fiscal Conservatives

Posted by Deepish Thinker on December 01, 2010
Current Events, Economics

It appears that Messers. Simpson and Bowles are having some difficulty rounding up support from either Republicans or Democrats for their deficit reduction proposal.

This was entirely predictable, but very disheartening for those of us who would like to see the deficit reduced mainly through expenditure control.  What Republicans have apparently failed to grasp is that time is not on the side of fiscal conservatives.  As this insightful article points out, the longer we wait the more inevitable tax increases become:

To understand the stakes facing fiscal conservatives, one must appreciate how demographics, program indexing methods and political realities combine to stack the deck against them. By bipartisan consensus, we won’t cut the benefits of those already in retirement; we won’t send a $2000 check to an 85-year-old widow in January and then cut it back to $1600 in February. Both parties (including the most conservative members) repeatedly reaffirm their dedication to this principle.

As a result, with each new class of retirees there is a new set of politically inviolate benefit obligations. Moreover, due to the wage-indexation of the initial benefit formula, the minimum threshold of politically acceptable future benefits rises with each subsequent class of retirees. So, with each year of delay the share of the problem eventually solved by tax increases inevitably rises.*

Well before 2037, unless we cut benefits for those already retired, a tax increase could not be avoided even if the entirety of payments to new beneficiaries were shut off. Thus, if action is delayed for several years, virtually all of the “solution” will consist of tax increases.

Our potential success in constraining the growth of taxpayer burdens therefore depends largely on when a solution is enacted. It is not so simple as deciding a particular solution is faulty, tearing it up, and trying again in a few years on the hope that conservatives’ political position will then be stronger. Such a strategy naively ignores demographic realities. Enacting Simpson-Bowles by contrast would allow conservatives to lock in constraints upon cost growth that simply will not be achievable under a delayed solution.

Republicans may not actually be serious about deficit reduction.  Or they may be calculating that they will be able to negotiate a better deal next year.

If the latter is true they are making a serious gamble.  The election largely wiped out Democratic moderates.  The Democrats who remain are likely to be more committed to closing the fiscal gap with new taxes, and very much aware that they only need to stall in order to get their way.

The Republicans have the opportunity right now to shape the deficit debate by endorsing some variant of the ‘bi-partisan’ Simpson-Bowles plan.  If they instead try and push a Republican plan next year the chances of getting a deal drop to near zero.  Unfortunately for the country, failure to get a deal is effectively the same as voting for higher taxes.

* Reference to a chart showing projected increase in Social Security beneficiaries has been omitted from the quote

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