Dean Baker: Deficit Commission Co-Chairs Ignore Economic Reality

Dean Baker, Co-Director of the Center for Economic and Policy Research
(CEPR) released the following statement on the proposals offered by
Erskine Bowles and Alan Simpson, co-chairs of the President's deficit
commission:

"Senator Alan Simpson and Erskine Bowles
appeared to have largely ignored economic reality in developing the
proposals they presented to the public today.

"The country is suffering from 9.6
percent unemployment with more than 25 million people unemployed,
underemployed or who have given up looking for work altogether. Tens of
millions of people are underwater in their mortgage and millions face
the prospect of losing their home to foreclosure.

"This situation is not the result of
government deficits, contrary to what Mr. Bowles seemed to suggest at
the co-chairs' press conference today. The downturn was caused by the
bursting of an $8 trillion housing bubble. This bubble was the basis of
the construction and consumption demand that drove the economic
expansion through 2007.

"The large government deficits are the
only factor sustaining demand following the loss of this bubble wealth.
If today's deficit were smaller, we would not be helping our children;
we would just be putting their parents out of work. Simpson and Bowles
somehow think they have covered this concern by delaying their cuts
until fiscal year 2012, 11 months from now. Virtually all projections
show the unemployment rate will still be over 9.0 percent at the point
when the Simpson-Bowles cuts begin to slow the economy further. This
leaves the economy like a plane with one engine already out and Simpson
Bowles prepared to knock out the other engine as well.

"The failure to understand current
deficits contributes to a misunderstanding of the debt burden. For
example, Simpson and Bowles raised fears of an exploding debt reaching
90 percent of GDP by the end of the decade. There is no reason that the
Fed can't just buy this debt (as it is largely doing) and hold it
indefinitely If need be, the Fed can use other tools at its disposal to
ensure that this expansion of the monetary base does not lead to
inflation.

"This creates no interest burden for the
country, since the Fed refunds its interest earnings to the Treasury
every year. Last year the Fed refunded almost $80 billion in interest to
the Treasury, nearly 40 percent of the country's net interest burden.

"This means that the country really has
no near-term or even mid-term deficit problem, just paranoia being
spread by many of the same people who led the economy into its current
disastrous situation.

"Over the longer term, the country is
projected to face a deficit problem but this is almost entirely
attributable to the projection that private sector health care costs
grow at an explosive rate. This projected growth rate of health care
costs would eventually lead to serious budget problems in addition to
leading to enormous problems for the private sector. However, the
underlying problem is the broken health care system, not public sector
health care programs. For some reason, though, Simpson-Bowles never
directly addresses these of the health care system.

"Simpson and Bowles apparently never
considered a Wall Street financial speculation tax (FST) as a tool for
generating revenue. This is an obvious policy-tool that even the IMF is
now advocating, in recognition of the enormous amount of waste and rents
in the financial sector. Through an FST, it is possible to raise large
amounts of revenue, easily more than $100 billion a year, with very
little impact to real economic activity. The refusal to consider this
source of revenue is striking since at least one member of the
commission has been a vocal advocate of financial speculation taxes. It
is also worth noting that Mr. Bowles is a director of Morgan Stanley,
one of the Wall Street banks that would be seriously impacted by such a
tax.

"Finally, it is striking that the
Co-Chairs felt the need to address Social Security, even though it was
not part of their mandate. The commission's mandate was to deal with the
country's fiscal problems. Since Social Security is legally prohibited
from ever spending more than it has collected in taxes, it cannot under
the law contribute to the deficit. Their proposal would cut benefits for
tens of millions of middle class workers who are overwhelmingly
dependent on Social Security for their retirement income. It would also
raise the retirement age for lower income workers who have seen little
increase in life expectancy.

"While there are some positive items in
the report (it would limit the mortgage interest rate deduction get rid
of the deduction for cafeteria benefit plans), it suffers from the fact
that the co-directors never reflected on their basic economic
assumptions. It is hard to avoid the conclusion that this exercise was a
waste of time and that we should go back to having Congress determine
our budgets through the normal process rather than secret commissions."