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Nothing Accomplished, But A Surprisingly Good Start

My low expectations for the president’s deficit-cutting commission will probably be realized this week, when the powerless panel, in all likelihood, fails to agree on a plan to fix the nation’s finances.

Yet, to my surprise, the panel has accomplished something very important: It pointed the way toward the compromises we will have to make if we are serious about maintaining American leadership in the 21st century. Our only other option is to keep putting off difficult choices until this country ultimately becomes the biggest deadbeat in history.

President Obama established the National Commission on Fiscal Responsibility and Reform early this year to propose a plan to “improve the fiscal situation in the medium term” and “achieve fiscal sustainability in the long run.” The bipartisan panel was tilted toward Democrats, which was not surprising given the party’s control of the White House and Congress at the time it was established, but Republican influence was enhanced by requiring at least 14 of the 18 member to concur on a final report. The deadline for that report was set for today — conveniently after the recent elections — and the mandate does not require that the commission’s plan lead to a balanced federal budget.

The commission can only make recommendations to the president. He is not obliged to accept its plan, and Congress is not required to vote on it. If the commission had a plan, that is. As I mentioned, it will take 14 votes to approve any plan, and I don’t think the commission will come close to that level of consensus. Yesterday, the panel postponed a vote on its report until Friday while its leaders try to gin up some support.

From the get-go, the commission seemed to be little more than a classic Washington attempt to get rid of an inconvenient issue — the nation’s spiraling debt — by studying it to death, or at least until after an election.

But then something unexpected happened. Last month, the commission’s co-chairs, Democrat Erskine Bowles and Republican Alan Simpson, released their own draft of a plan to sharply curtail the federal deficit through a combination of tax overhaul and spending restraint, including a long-term rise in the Social Security retirement age.

In a statement of “guiding principles and values,” Bowles and Simpson wrote: “America cannot be great if we go broke. Our economy will not grow and our country will not be able to compete without a plan to get this crushing debt burden off our back.”

The plan was attacked from both sides of the political spectrum, but the most negative reaction has come from Democrats. Outgoing House Speaker Nancy Pelosi, for example, called it “simply unacceptable.” And from her point of view, that is entirely correct, because the Bowles-Simpson proposal is built on the principle that government finances cannot be fixed mainly by higher taxes, especially if those taxes are directed at business or a small slice of wealthier Americans. This is the approach Pelosi and most self-described “progressives” favor.

The problem is that an individual, a business or a government can always find ways to spend every dollar of income plus whatever can be borrowed. Budgeting is, ultimately, about putting limits on spending and making choices about where to spend. The ability to generate income is important, of course, but it is secondary. And that is exactly how Bowles and Simpson propose to treat it.

Their plan would constrict almost the entire swath of federal spending, including cherished entitlements like Social Security. It would attack sacrosanct tax breaks, notably including the personal income tax deduction for mortgage interest, which contributed to our recent national binge of excessive spending on housing. But it also would lower maximum tax rates on individuals and businesses. This is in line with another Bowles-Simpson guiding principle, to “make America the best place to start and run a business and create jobs.”

The prospect of lower tax rates and diminished middle-class benefits are anathema to Democrats and their labor supporters. AFL-CIO President Richard Trumka said the Bowles-Simpson plan “just told working Americans to drop dead.” Yet all sorts of business interests, from health care providers to real estate agents to military contractors, will be looking to kill or gut the proposal as well, if it ever gets out of the starting gate.

Republican deficit-hawks and Tea Party activists who demand a balanced federal budget, backed by a constitutional amendment to limit deficit spending, are not going to be happy either. The Bowles-Simpson proposal would not be expected to bring the federal budget into balance for decades. These same voices on the political right will, for the most part, also oppose the tax-increasing elements in the plan. But they simply have no answer for how to cut spending sharply and quickly enough to balance the budget without raising taxes, mainly because there is no such answer. Politically and practically, it is not going to happen.

Bowles and Simpson have done the country a huge favor by laying out, in reasonable detail, what a credible budget-reform plan ought to look like. Nobody is going to be happy with it. The most committed activists on either side are going to tacitly join forces to kill it or at least delay it as long as possible.

Like peace in the Middle East, it is now quite clear what a real solution is going to entail. It is just a question of how much blood will be spilled in one case, and how much red ink in the other, before we get there.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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