Personal Wealth Management / Politics

Simpson-Bowles II: Along Came Sequester

Roundly viewed as DOA, it seems the Simpson-Bowles plan may get a new life—for now.

Last time Messrs. Simpson and Bowles hatched a plan, Congress let it fizzle. Will the sequel fare better? Photo by Mark Wilson/Getty Images.

In 2010, after President Obama appointed Senators Alan Simpson and Erskine Bowles as co-chairmen of his administration’s deficit-reduction committee, the gentlemen drafted a $4 trillion package of budget cuts and tax loophole closures—and it’s sat on the shelf ever since (Congress, as usual, preferred dithering, bickering and can-kicking over sweeping compromise). But on Monday, they tried again.

Effectively adding to their 2010 plan, Simpson and Bowles (one a Republican, one a Democrat) released a proposal to avoid the sequester—including cutting government spending, eliminating several tax deductions and changing the way inflation is calculated—once and for all. Their stated goal (and one we can sympathize with) is to avoid the sort of Band-Aid, short-term legislative patch that’s all-too common in DC. For example, the sequester looms because politicians couldn’t put together a longer-term budget agreement, and the sequester was pitched (by the president, incidentally) to force compromise. Compromise didn’t happen, and here we are.

Hence, Simpson and Bowles, The Sequel: Will It Be Any Different From the First?

Likely not, though the plan appears fairly bipartisan (for all that may be worth). Republicans likely appreciate the proposed cuts to entitlements like Social Security and Medicare, while Democrats probably support the recommended tax revenue increases. And, in our opinion, everyone can benefit from a flatter, lower, simplified tax code. Simpson and Bowles expect their plan to reduce government spending by $2.4 trillion over the next 10 years, should it go into effect.

Don’t get us wrong, less government spending is likely a boon for the economy overall, as it frees up potential for private sector growth. But, like Simpson and Bowles’s proposal in 2010, we don’t see much reason to think Simpson-Bowles, The Sequel, will create the long-term solution the 2011 Budget Control Act and the not-so Super Committee also failed to create.

We don’t necessarily doubt the new proposal’s intentions are good. We even liked some of what we read! However, first, long-term projections about assumed savings should be taken with many grains of salt. Anything can (and will) happen between now and 10 years from now. Economic growth might be faster or slower. New politicians might alter the plan (if it’s adopted) or abandon it—or come up with their own. And so on.

Second, adopting long-term solutions means robbing politicians of campaign-fund-raising wedge issues like this (or the fiscal cliff, the debt ceiling, etc.). So Republicans and Democrats likely pass on longer-term reforms (no matter how sensible or not) and continue standing their ground and largely disagreeing for the foreseeable future—and likely well-past the sequester’s zero hour, whether it’s March 1, 27 or sometime in April.

Fortunately, macro economically, it likely doesn’t much matter. As we’ve recentlywrittenbefore, though there’s quite a bit of media hoopla touting otherwise, the automatic spending cuts expected to gradually take place beginning March 1 likely have little overall impact on the US economy. Yes, public sector winners and losers likely emerge from whatever decision Congress makes (or doesn’t). But overall government spending is slated to fall just slightly in 2013 (less than it fell in 2012) and grow ever after. Meanwhile, the US private sector is much bigger, very healthy and remains the primary driver of economic growth—as it has for this entire expansion.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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