Tuesday, July 19, 2011

The "Gang of Six" Plan Isn't Worth the Paper It's Printed On

There has been quite a hullabaloo over the "Gang of Six" plan that was just announced today with even Obama calling it "good news".  Unfortunately, it's a complete waste of time.  First, it's a little bit unclear how much all six of the "Gang of Six" is actually behind the plan as Tom Coburn, supposedly one of the six, just released a budget proposal that cuts $9 trillion from the deficit in 10 years, compared to the plan's paltry $3.7 trillion.  Second, it will have no impact on the current debt limit talks as it is pretty much nothing but an outline, as Dick Durbin admitted.  Third, it is so back-end loaded that I don't see how it gets through the House (it also has to start in the House because it raises taxes).  Supposedly it is in two parts, a $500 billion down payment of "immediate cuts" (in Congressional terms, "immediate" means 10 years) with "comprehensive" reform coming later.  $500 billion averages out to $50 billion a year.  Considering we will have a $1.6 trillion deficit this year according to the White House, this is a paltry sum, about 3%.  That pretty much puts this down payment in sub-prime land.  And fourth, it's not a very good plan at all.
Now, let's take a look at the "immediate" section of the plan:

  • Impose statutory discretionary spending caps through 2015.
  • Implement numerous budget process reforms.
  • Shift to the chained-CPI (a more accurate measure of inflation) government-wide starting in 2012, along with the following specifications for Social Security: (1) exempt SSI from the shift for five years, and then phase in the shift over the next five years; and (2) provide a minimum benefit equal to 125% of the poverty line for five years. (According to CBO, the shift to chained-CPI would result in the annual adjustment growing, on average, about 0.25 percentage points per year slower than the current CPI.)
  • Repeal the CLASS Act.
  • Enact concrete policy changes that lock-in additional savings, including freezing Congressional pay and selling unused federal property.
  • Require GAO and the Department of Labor to report to Congress on establishing a more effective unemployment insurance trigger.

Do you see any actual cuts there?  Any at all?  For every dollar we are taking in, we are spending $1.50 and all these guys can come up with are caps on spending and changing the way CPI is calculated (which might not even reduce the deficit if inflation is higher than current estimates)?  This is such a non-serious festering turd of a cost cutting plan.

And now let's go to the "comprehensive" section of the plan which begins with:

  • Require committees to report legislation within six months that would deliver real deficit savings in entitlement programs over 10 years
So all they have to do is "report legislation"?  Boy that's reassuring.  I'm sure that in six months, when we are in the middle of a Presidential election year, there is no way this legislation will get bogged down.  Anyway, there is more:

  • Finance would permanently reform or replace the Medicare Sustainable Growth Rate formula ($298 billion) and fully offset the cost with health savings, would find an additional $202 billion/$85 billion in health savings, and would maintain the essential health care services that the poor and elderly rely upon.
So we are going to have $500 billion in "health savings" without impacting services.  And how pray tell are they expecting to do that, especially after Obamacare just cut a similar amount from the program?  If they can't cut services won't that mean they will have to cut payments to physicians and hospitals?  That will have two impacts, first, even more doctors will stop accepting medicare patients as it's just not economical.  Second, the losses hospitals face on their medicare patients will be made up by charging more to those of us with private insurance.  Brilliant!  That's just what we need, higher premiums.  Higher premiums means a higher cost to employ someone and will mean fewer jobs.  No wonder our economy is in shambles, our politicians have not yet learned that if they meddle in one area, other areas are also affected.  Now here comes a nice amorphous goal that could have far-reaching implications:

  • Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families.
Basically that means that the middle class gets screwed as they are the ones who benefit most from these "tax expenditures" (a term which I hate because it seems to assume that everyone's income actually belongs to the government).  I love how the government is making insurance premiums balloon thanks to Obamacare regulations and medicare cuts and then wants to tax me on those premiums.  How does that make any sense?  Do I get the premiums?  Don't the premiums effectively reduce my salary?  Why should I have to pay taxes on money I never see for healthcare that other people get for free from the government.  How is that fair in any way, shape or form? 

I also don't understand the need to "reform" charitable giving deductions.  Isn't giving to charity a good thing?  Does the government really think it has better use for that money?  That it somehow is more efficient?  Don't make me laugh. 

On the mortgage interest deduction, I do understand that it is a big line item but reforming it or getting rid of part of it isn't the answer.  Mortgage interest has been deductible since the first federal income tax law in 1913.  Over the course of the last almost 100 years, it's made houses at the same price point more affordable than they would otherwise be, hence acting as a tailwind on housing prices.  Basically, because buyers could afford to pay more, sellers have generally sold their houses for more.  So I don't think any of us today are actually been benefiting from it the way we think we have.  If it were never enacted, real estate prices would be lower across the board, probably putting your monthly payment around where it is now, with the deduction.  So the house you might have paid $400,000 for, would actually have been $300,000 without the deduction.  So while we probably have not benefited from it, cutting it would have a disastrous impact.  Housing prices would immediately take a hit as they would become less affordable.  This would send many homeowners underwater or further underwater, making any sort of refinancing impossible.  Also, banks still have quite a bit of mortgage debt on their books, so any change in the mortgage interest deduction would have an immediate impact on banks and would probably cause ANOTHER banking crisis.  Seriously, it's amazing how these politicians don't think things through.  Now on to the next and final "reform" that I want to comment on:

  • Maintain or improve the progressivity of the tax code.
Say what?  We are already the most progressive system in the world and now they want to make it more progressive.  According to the Tax Foundation, nobody leans on the top 10% of earners like we do.  Not France, not Germany, not even Italy.  Plus, 47% of Americans pay no federal income tax (which is why you have so many Democrats opposing tax cuts, because they know their constituents won't get any benefit).  If anything we need to make it less progressive, making everyone a true stakeholder in what happens with the budget.  If you pay no taxes, you have an incentive to be in favor of the most spending as possible because you personally won't need to pay for it.  A less progressive system, I think, will lead to a more responsible government.

As you can see, the plan is a completely idiotic monstrosity that probably will end up doing more harm than good.  Luckily, it's only an outline at this point and has just about zero chance of going anywhere (hopefully).

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