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Simpson-Bowles: $4 Trillion of Beltway Mumbo Jumbo

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In the here and now, where it counts, the plan amounts to an earnest pinprick and little more.

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Worse still, the co-chairmen's plan gets to its paltry $100 billion revenue gain through the most convoluted route imaginable. It launches a frontal assault on $1 trillion worth of annual tax expenditures that are literally anchored to the K Street sidewalks in order to drop 80% of the revenue gain into tax rate reduction, not deficit reduction. Stated differently, the plan calls for the expenditure of nearly unfathomable amounts of political capital to shrink tax preferences for mortgage deductions, employer health plans, municipal bonds, and corporate loopholes of every shape and size. Yet it ends up with so little net revenue gain that taxes as a share of GDP would be only 19.3 % in 2015 -- a target lower than projected for the original Reagan tax cut way back in 1981!

This whole bizarre scheme was undoubtedly designed to win Republicans over to the task of revenue raising by hiding the broccoli in the garden salad. But that's too clever by half because it also means that the 39.5% tax rate on the richest Americans that would become effective in 2011 would be reduced instead by one-third -- to 28% -- under Simpson-Bowles. There's no way on earth so-called progressives are going to sit still for that.

And they shouldn't because the world has long ago passed beyond the time and circumstances in which the Republican theology of low income tax rates was relevant. Back in the 1980s, when the nation had a comparatively clean balance sheet, an eager baby-boom population, and hadn't yet outsourced large parts of the middle class production and business service economy to Asia and the emerging markets, there was a compelling case for income tax rates geared to entrepreneurial advance.

But 30 years later our objective circumstances are a far cry from morning again in America. It's more like sundown, if the truth be told, owing to the massive debt deflation now underway and the imminent retirement of 80 million baby boomers who have saved comparatively nothing and will therefore consume massive fiscal transfers on their way off the stage. Under these conditions, the days of rising living standards and robust economic growth are long gone. What's relevant now is maintaining national solvency -- and that requires equitable burden sharing of the massive taxes due bill, which is relentlessly coming our way in the decades ahead.

The co-chairmen's plan is equally hostage to the vestigial ideology of the Left. Spending for the retirement entitlements -- Medicare and Social Security -- will total nearly $1.5 trillion by 2015 but the plan includes less than $30 billion of net savings -- that is, just 2% of the preponderant core of the welfare state budget. To be sure, the plan includes considerable arm waving about raising the retirement age 40 years from now and the need for new health cost containment mechanisms. But what the plan doesn't do is utter the two words that could actually make a material difference in the fiscal equation: "means test."

The fact is, probably two-thirds of the $1.5 trillion in retirement entitlement spending goes to elderly who have virtually no private assets, pensions, or other income, and literally could not survive without the full measure of current law income and medical-care benefits. But the remaining $500 billion goes to the top quarter of the retired population, which does have private means -- and in the case of the very top ranks, very considerable private wealth. A properly structured means test that treated Medicare and Social Security as a combined cash equivalence, could efficiently, fairly, and reliably extract $100 billion, or 20%, of the spending that would otherwise go to the top quartile of the elderly. Such measures would make a difference in the here-and-now fiscal equation when the true fragility of the global bond market and monetary system is certain to be tested.

Just like in the case of the missing revenue-raising plan owing to Republican tax theology, however, the missing entitlement means test is attributable to the "social insurance" mythology held by the Democrats. But contrary to the latter, almost no beneficiary "earned" the benefits they are entitled to under current law. And the trust fund is a pure accounting artifact with $3 trillion in paper "reserves" that represent payroll taxes collected long ago and have been fully spent on general fund programs or squandered on farm subsidies, middle-class student loans, and bribes to Afghan tribal leaders, as the case may be.

Thus the social insurance myths are basically a cover for a pure fiscal operation that's essentially an intergeneration transfer scheme. Unfortunately, the benefits promises made to the baby-boom generation can't be kept without turning the generation still in the work force into virtual tax serfs. Undoubtedly, the co-chairmen choose to take a powder on the means-test issue in part to spare themselves of inane Republican lectures about "privatizing" this Ponzi scheme for those under 40. But at the end of the day, the Democrats are so fiercely dug in against means testing that they didn't even try to raise the issue.

Finally, the co-chairmen also took a powder on the last big chunk of the budget -- the $1.4 trillion that goes to "discretionary" spending. To be sure, they propose to save about 12%, or $175 billion, by 2015 by means of various "caps" and "freezes." But it doesn't take a commission and a whole regiment of beltway staffers to imagine a cap at an altitude of 10,000 feet above the budget nitty-gritty, where real programs live and fierce bureaucratic and interest group defenders are dug in behind nearly every dollar.

The fact is, $800 billion, or two-thirds of the discretionary spending, is for national security, including homeland security. A mere "cap" is an earnest wish and little more. The only thing that can come even close to the savings projected by the commission is a sweeping demobilization of the nation's vast and far-flung military establishment. That means elimination of numerous army and marine divisions and air force air-wings; mothballing of dozens of navy warships and several carrier-battle groups; elimination of hundreds of bases and overseas facilities; and cancellation of a fair share of new weapons procurement programs currently in the pipeline.

The reality is that the days of policing the world and foreign policy adventurism of the type embodied in George Bush's two unnecessary wars are over -- not just because such policies are wrong-headed but also because they're profoundly unaffordable. It would have been helpful, therefore, if the co-chairmen had said something to that effect. But in 59 pages of beltway mumbo jumbo, the reader won't find a single policy declaration that supports the magnitude of Pentagon shrinkage that will be necessary to restore fiscal solvency.

So forget the $4 trillion headline -- that's just reflective of the old Washington game of projecting a decade's worth of guesstimates into the foggy future. The truth is, in the here and now, where it counts and where the coming conflagration in the global bond and currency markets might have been forestalled, the co-chairmen's plan amounts to an earnest pinprick and little more. But it's not their fault. Instead, it reflects the degree to which the nation's fiscal governance has fallen hostage to partisan ideologies that are utterly detached from the real-world conditions we face. It's a certainty that the plan -- however it's finessed on Friday -- will be DOA in the new Congress. The stalemate now runs so deep that only a thunderous crack-up of the global financial system is likely to make any difference, and when that day of reckoning actually comes it will be too late for Washington to do anything about it.

Steve Smith's OptionSmith portfolio is +40% in 2010. Take a FREE 14 day trial to get exclusive access to the portfolio and trade alerts emailed to you before every trade. Learn more.


No positions in stocks mentioned.

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