Deficit Reduction: The Great Distraction

This is the week of the third annual Deficit Fest, the event sponsored by Wall Street billionaire Peter G. Peterson. At this event, many of the people most responsible for the current downturn come together to tell us why we should be worried about the deficit at a time when 25 million people are unemployed, underemployed or have given up looking for work altogether and millions face the prospect of losing their homes.

Past deficit fests included exchanges where Peter Peterson and former Treasury Secretary and Citigroup honcho Robert Rubin mused about their comparative net worth. We also got to witness President Clinton bemoan the fact that the Democratic and Republican leadership in Congress teamed up to prevent him from cutting Social Security. Had Clinton gotten his way, millions of seniors would be getting by on Social Security checks that are more than 10 percent smaller than what they now receive.

Peterson is also known for his sponsorship of the "Economic Sleepwalk" tour, which was officially billed as the "Fiscal Wakeup" tour. This involved sending a group of policy wonks around the country to complain about the budget deficit at a time when the housing bubble was growing to ever more dangerous levels. While some of us were doing our best to warn of the imminent disaster, Peterson was using his money and political connections to dominate media space at a time when the country's debt-to-GDP ratio was actually falling.

But why harp on the past? We should be focused on the future.

And one of the items that this group would like to see in our future is a deficit deal like the one proposed by Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama's deficit commission. (The Bowles-Simpson plan is inaccurately referred to on the commission's website as a report of the commission, ironically on a page titled "Moment of Truth." In fact, it is only the report of the co-chairs since it did not receive the 14 votes needed to be approved as an official report of the commission.)

This plan includes a wide range of budget cuts, including cuts to Social Security and Medicare. It would reduce the annual Social Security cost-of-living adjustment by 0.3 percent, which would lower lifetime benefits by an average of more than 3 percent. It would also raise the retirement age for Social Security. To balance these cuts to programs that benefit tens of millions of ordinary workers, Bowles and Simpson would cut the corporate tax rate from 35 to 28 percent and would lower the tax rate paid by the very wealthy from 40 percent to 28 percent. While these reductions in tax rates are supposed to be offset by the elimination of loopholes that benefit the wealthy, people have good cause for skepticism.

If these policies seem out of step with the interests of ordinary workers, it should not be surprising given their parentage. Erskine Bowles in particular could be the poster boy for everything that is wrong in national politics today. Bowles rose to become chief of staff in the Clinton White House in the 90s. He then twice competed unsuccessfully for Senate seats in North Carolina. As a consolation prize he became the President of the University of North Carolina.

Since it is hard to make ends meet on a university president's salary these days, Mr. Bowles also did a little bowling for dollars. He moonlighted as a director on corporate boards, serving stints at Morgan Stanley, the huge Wall Street investment bank, General Motors (until it went bankrupt), and most recently Facebook.

Being a director on a corporate board typically involves attending 4-8 meetings a year. For this, directors receive several hundred thousands of dollars in compensation. For example, in 2008 Erskine Bowles received $335,000 in compensation for his work on Morgan Stanley's board.

This year is noteworthy because Morgan Stanley's dealings in mortgage-backed securities brought it to the edge of bankruptcy in the fall of 2008. It was only saved from disaster by the generous intervention of Ben Bernanke. He allowed the bank to change its status in the middle of the post-Lehman crisis, and become a bank holding company. This gave it the protection of the Fed and the FDIC.

Given this near brush with death, shareholders might ask what Mr. Bowles did for the $335,000 that we paid him. "We" is appropriate in this sentence, since much of the public has a stake in Morgan Stanley either through an index fund in a 401(k) that likely holds some of the company's stock or the defined benefit pensions that most state and local governments still have for their workers.

In fact, we should be asking this question of directors more generally. When shareholders voted "no" last month on the pay package of Citigroup's CEO, Vikram Pandit, they were saying that the company's well-paid board was not doing its job. These directors were getting paid $250,000 each year for just a few days' work. Their job is precisely to prevent such outlandish pay packaged for top management.

The failure of these highly paid directors is a major national problem. Their compensation looks more like payoffs than paychecks. After their palms get greased, they look the other way when the CEOs walk away with tens or even hundreds of millions of dollars of the shareholders' money. And the outsized pay of the CEOs corrupts pay scales throughout the economy. Even heads of charities can now command pay packages in excess of $1 million a year.

Anyhow, when we hear Erskine Bowles and his friends rant about the deficit this week, we should remember that once again they are distracting the public from the country's real problems. And this crew is at the center of those problems; it is not the solution.