Deficit Reduction: Are Higher Taxes and Reduced Military Spending Coming? Can the "Gang of Six" Accomplish Anything?

President Obama has announced his deficit-cutting plan as has Republican Senator Paul Ryan. The problem is those plans are light-years apart with little hope of getting either plan out of the Senate.

Ryan's plan may pass the House where Republicans have a solid majority, but it would immediately be dead on arrival in the Senate.

In recognition of the above, a group of six senators, three Republicans and three Democrats got together, and after nearly splitting up over differences, have managed to come together with a plan to reduce the deficit.

Gang of Six Members

1. Senator Richard J. Durbin, a progressive Democrat from Illinois
2. Senator Kent Conrad a North Dakota Democrat who leads the Budget Committee
3. Senator Mark Warner, a Virginia Democrat.
4. Senator Saxby Chambliss, a Georgia conservative Republican
5. Senators Tom Coburn M.D. an Oklahoma, Republican
6. Senator Michael Crapo an Idaho Republican

"Gang of Six" Nears Consensus on Deficit Plan

Please consider �Gang of Six� in the Senate Seeking a Plan on Debt

Days after President Obama called for forming a bipartisan group in Congress to begin negotiating a $4 trillion debt-reduction package, the parties have not even agreed to its membership. Yet six senators � three Democrats, three Republicans � say they are nearing consensus on just such a plan.

Whether the so-called Gang of Six can actually deliver something when Congress returns from a recess in May could determine whether Democrats and Republicans can come together to resolve the nation�s fiscal problems before the 2012 elections.

As Mr. Obama and Republican leaders have warred publicly over the budget, this small group of senators has spent four months in dozens of secretive meetings in offices at the Capitol and over dinner at the suburban Virginia home of Senator Mark Warner, a Democrat.

The senators have weathered criticism from bloggers and even colleagues, including the leaders of their own parties, who oppose tampering with Social Security or taxes. The gang nearly collapsed several times, including two weeks ago.

If Mr. Durbin and Mr. Chambliss can cut a deal on Social Security and new tax revenues, their associates say, then just maybe all of Washington can come together.

For Republicans, that means accepting higher taxes and lower military spending. For Democrats, it would mean agreeing to curbs on the unsustainable growth of Medicare and Medicaid spending, as well as tweaks to Social Security, to avert a big shortfall in 2037 and as a trade-off for Republicans� support on taxes.

Several months ago, with Mr. Durbin as its most surprising yes vote, 11 of the 18 members of the president�s fiscal commission backed a blueprint to pare $4 trillion from projected deficits in the first decade. It would cut domestic and military spending; curb Medicare and Medicaid; and overhaul the tax code, limiting or repealing tax breaks and using the new revenues to lower tax rates and reduce deficits. Separate from its debt-reduction plan, the panel proposed benefit and payroll tax changes to stabilize Social Security for 75 years.

Mr. Durbin, the liberal Democrat, and Mr. Chambliss, the conservative Republican, may have the most at stake. Mr. Durbin could be isolated in the Senate leadership, and Mr. Chambliss potentially vulnerable given Republicans� penchant for ousting incumbents who deviate from the antitax line. Neither senator faces re-election until 2014.

An administration official recalled that in early 2010, when Mr. Durbin was named to Mr. Obama�s fiscal commission, another White House official told its co-chairmen, �You�ll never get Durbin�s vote.�

Nine months later, Mr. Durbin announced his support in The Chicago Tribune for the recommendations the chairmen had negotiated with members. �The question my closest political friends are asking is this: Why is a progressive like Dick Durbin voting for this deficit commission report?� he wrote. The answer: �Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable.�

A bolt came in February from Grover Norquist, a Republican antitax activist, who wrote to Mr. Chambliss, Mr. Coburn and Mr. Crapo to say they would violate his group�s �Taxpayer Protection Pledge� if they supported raising revenues for deficit reduction.

The trio countered the same day, releasing a letter telling Mr. Norquist that their effort broke no pledge �but rather affirms the oath we have taken to support and defend the Constitution of the United States against all enemies, foreign and domestic, of which our national debt may now be the greatest.�

Reduced Military Spending?

Of the six senators, I am probably closest aligned philosophically-speaking to Senator Tom Coburn of Oklahoma. He is one of few Republicans willing to consider doing something about bloated military spending.

Please consider his Memorandum on the Defense Budget to the Debt Commission.

Despite decades of acquisition reform from Congress, the Pentagon, and the think tanks, the Government Accountability Office (GAO) tells us that cost overruns in weapon systems are higher today, in inflation adjusted dollars, than any time since they have been measured. Last year, Congress passed the Weapon System Acquisition Reform Act of 2009. Almost every Member of Congress supported it, along with top Department of Defense managers. The early returns on the enactment of this legislation are not encouraging. ...

The single most important step to solving this depressing array of problems is to better understand how the Pentagon spends its money - both historically and prospectively. Without an accurate grasp at the start of a spending program as to its most likely cost, schedule, and performance, how can decision makers understand the future consequences of their actions? Today, an ethic continues to predominate in the Pentagon that consistently paints an inaccurate picture � one that is biased in the same, unrealistic and ultimately unaffordable direction. The errors are not random: actual costs always turn out to be much higher than, sometimes even multiples of, early estimates.

The reason is simple; the Pentagon doesn't know how it spends its money. In a strict financial accountability sense, it doesn't even know if the money is spent. This incomprehensible condition has been documented in hundreds of reports over three decades from both the Government Accountability Office (GAO) and the Department?s own Inspector General (DOD IG).

Please read that memorandum. It describes many problems with military spending gone wild, and how little we get for what we do spend.

Higher Taxes?

Are Senators Saxby Chambliss, Tom Coburn, and Michael Crapo heroes or goats for considering higher taxes?

The answer depends on details we have not seen:

• How high?
• On who?
• What in return?
• Will it balance the budget?
• When?

Existing Plans Not Passable

Obama's plan does not balance the budget. Neither does Senator Paul Ryan's plan. Moreover, I highly doubt one can come close to balancing the budget without considerably raising taxes or considerably cutting the defense budget, most likely both.

Sure, one can balance the budget in theory without raising taxes, but it would require massive cuts in military spending, huge cuts in entitlements, and getting rid of entire departments such as the Department of Energy and Department of Education.

I am in favor of all those things, and if there was anything left over, I would be quite fine with tax hikes. However, my plan has no chance either.

What is the Goal?

Even if Republicans win the presidency in 2012, unless Republicans pick up a filibuster-proof majority in the Senate, it will be difficult to get much done.

We will not accomplish much without a goal. Unfortunately, there is no goal. I have a simple proposal: Balance the budget by 2022 come hell or high water

To achieve that goal will require compromises. Republicans will have to give in on defense spending and taxes. Democrats will have to give in on entitlements. Crop supports have to end.

Crop support is not Republican or Democratic issue per se, but a difference between agricultural vs. non-agricultural states.

Scrap Davis-Bacon, Enact National Right-to-Work Laws

There are also many structural problems that need to be addressed. States and municipalities need relief as well.

To help states and muniucipalities, we need to scrap Davis-Bacon and all prevailing wages laws. We also need enactment of national right-to-work laws.

Not only will those changes reduce costs on federal infrastructure work (interstate highway repair for example), those changes will provide enormous help to cities and states forced to pay union wages and benefits to get anything done.

Health-Care Changes

We need a free market in medical insurance. As such, medical insurance plans need to cross state lines, and drug imports from Canada must be allowed. I recommend lower patent times on drugs. Medicare should only offer generic drugs.

The above health-care proposals would provide enormous savings.

Will Anything be Done?

I do not know what is in the "Gang of Six" plan because details are not out. What I do know is the status quo is not acceptable, and that existing plans by Obama and Paul Ryan are not passable.

Do Republicans and Democrats really want to do something about the deficit? I suspect not, but we are about to find out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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