Gang of Six Weighs In

With the clock ticking toward the August 2 “deadline” to resolve the current debt ceiling debate, the “Gang of Six”—a bipartisan group of, yes, six senators—has presented their plan. And a fine plan it is, as far as political plans go. It’s getting approving nods from both sides of the aisle and President Obama has also endorsed it.

The plan is meant to cut the deficit by an estimated $3.7 trillion over the next 10 years by:

• Placing immediate caps on certain spending (not specifically detailed).
• Revamping the tax code by killing certain deductions, lowering tax rates, and ending AMT. (The prospect of this would make us giddy if we believed any of this would actually happen.)
• “Stabilizing” Social Security over the next 75 years. (Good luck.)
• Creating congressional committees to study how to reduce the deficit more. (Ah. Here we go. This is the sort of thing we expect from these kinds of plans. More study committees.)

According to the plan’s architects, deficit reduction over the next 10 years will come three-fourths from spending cuts and one-fourth from new tax revenues. All of this sounds very rational. And we think a saner, simpler tax code with lower personal and corporate rates would be a tremendous net benefit to the US—one the bean counters simply can’t account for. Just think about lost productivity tied to navigating our trippy labyrinth of a tax code.

We are generally optimistic about the long-term future, believing profit-motive and human ingenuity will lead, in irregular fits and starts, to ever-increasing innovation and societal wealth over time. However, there’s about zero chance congress passes a flat tax between now and August 2.

We are also exceedingly skeptical that anything politicians do today has remotely the outcome they expect 10 years from now—much less 75 years. Why? First, political projections are usually fraught with biases and error (and sometimes basic mathematical mistakes). And even if they were bias- and error-free, how reliable are projections made today hinging on things like future economic growth, future tax receipts, etc.? (Answer: Not very.) Such things are hard enough for professional economists to estimate, never mind politicians. And what about future compliance with said plan? Any projections made today based on pinky-swears to follow a plan written by current sitting legislators can go kablooey as soon as the political winds shift.

Let’s also keep in mind congress hasn’t passed a budget in two fiscal years, so the odds a comprehensive overhaul to our tax code (among other things) gets agreed upon in the next 13 days is a touch optimistic.

As we’ve covered before, the debt ceiling debate is largely political. Need more evidence? Much has been made of Moody’s putting the US on warning about a possible cut to its vaunted AAA rating. Moody’s suggestion to do away with this rating-cut threat? Eliminate the debt ceiling. Do that, and all this political bickering ends.

We don’t mean to suggest the US should, without a debt ceiling, go on a wild, debt-fueled spending craze. We generally prefer a smaller government, relatively, because we think you are a much smarter steward of your money than any Gang of Six (or 535). But the debt ceiling is purely arbitrary. How can you know? Put it at $100 trillion and ongoing economic growth means we likely hit it one day.

What does all this mean for the Gang of Six and their grand plans? The debt ceiling debate doesn’t hinge on this (or any other) grand bargain. Congress could, today, say, “Let’s be done with this,” and move or eliminate the debt ceiling. The existence of the debt ceiling at its current (or any) level doesn’t guarantee that our politicians are smarter at crafting economic policy. It just guarantees future fodder for endless heated rhetoric.