By Stephen Nellis Friday, October 26th, 2012

When it comes to the future of the United States, whoever wins the presidency and takes control of Congress on Nov. 6 are far less important than what those winners choose to do about the nation’s long-term fiscal trajectory when they arrive in office.

The nation’s debt load has reached $16 trillion, swollen by two unfunded wars in the Middle East and an across-the-board tax cut that was largely not offset by spending cuts. The deficit has reached 9 percent of gross domestic product as tax revenues slumped along with the economy.

But most troubling is that spending on entitlement programs such as Social Security and Medicare is set to spiral as baby boomers enter retirement.

There is,  however, a plan: “The Moment of Truth,” the result of a bipartisan commission on fiscal sustainability formed in 2010 and co-chaired by Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, a former chief of staff under Democrat Bill Clinton.

Simpson and Bowles will speak at UC Santa Barbara on Nov. 1 to detail their plan to the public.

The commission has called for a mix of spending cuts and revenue increases. Nominally, there is a three-to-one ratio of cuts to revenue, though the true number ends up being closer to 55 percent cuts to 45 percent revenue increases because the commission assumes that at least some of the Bush-era tax cuts will be allowed to expire.

Most politicians try to craft policies that are as painless as possible and give everyone something to love. Simpson and Bowles have done the dirty-but-necessary work of spreading the pain and giving everyone something to hate.

“We don’t do bullshit and mush,” Simpson told the Business Times. “We’re going to piss off everyone. That was our job, and we did it.”

The commission recommends caps and cuts to discretionary spending – including deep cuts to the military, which, at more than $600 billion a year, eclipses every other optional program by two orders of magnitude but is often held sacrosanct by tough-talking politicians.

“I know what goes on in the military,” said Simpson, who served in the U.S. Army during the 1950s. “We have 1 million to 10 million contractors in this country, and we can’t even get an audit to figure out what they cost.”

Health care for military personnel is a much less politically popular target for spending cuts than contractors. But Simpson said Tricare, the program for most personnel, must be reworked.  Enrollees pay $520 a year and receive coverage for themselves and dependents. It costs the government $53 billion a year. “They’re wonderful people. Probably 10 percent of them have been in a combat situation,” Simpson said. “We don’t do myth. We do math.” The commission has also recommended gradually raising the Social Security retirement age, cost-control measures for Medicare, and reducing income tax rates but trimming popular deductions like the mortgage interest deduction. The home mortgage deduction would apply to only a principal residence and be capped at $500,000, and it would be augmented with a credit.

“Who the hell needs a million bucks of home mortgage interest deductions? We say knock it down and give everyone a 12 percent tax credit,” Simpson said.

On the other hand, they recommend both lowering the nominal U.S. corporate tax rate – which is currently 35 percent, though few U.S. corporations pay that as an effective global rate – to make the country more competitive. Simpson said the reforms would also make it easier for corporations to bring their profits ashore and reinvest them to end  the global cat-and-mouse game the big companies now play to route profits through subsidiaries in lower-tax countries. “We’re the highest rate in the world. We say, take it from 35 to 26,” Simpson said, noting that the plan would ensure “you can bring the money back without having it taxed twice.”

Simpson said that the markets — “nameless people who love money” — would eventually punish the United States’ fiscal sins with higher interest rates on the nation’s debt load. Currently, investors are still willing to receive negative real interest rates on 10-year inflation-protected Treasury notes — that is, they are willing to pay money out of pocket for the security of dollar-denominated debt over the next decade.

Asked when the tipping point on interest rates might come, Simpson gave no substantive answer. But he did say that it would be ordinary investors who are most likely to suffer.
“It ain’t dire yet,” he said. “When it starts, it’s called a run. … The big guys never get stuck.”

While the commission’s report has drawn bipartisan support – it garnered votes from Sen. Tom Coburn, R-Okla., and Sen. Dick Durbin, D-Ill. – its prospects in the wider congress seem dim. Simpson said a new breed of politician is needed to think responsibly about the long-term fiscal health of the nation. He blamed gerrymandering.

“These congressional districts have been so gimmicked by the parties that you win the primary and you’re home free. But if you mess around in the primary and you’re a lefty, they’ll put somebody in from a senior group or a union to take you out. If you get a little too frisky on the Republican side, Grover Norquist will put somebody in and take you out,” Simpson said. “That’s where America is right now.”

Simpson and Bowles will speak on at 8 p.m. at Campbell Hall on the UCSB campus. Tickets are $30. For more information, visit https://artsandlectures.sa.ucsb.edu.