Simpson-Bowles

Alan Simpson appeared on Capital Account recently. Senator Simpson was co-chair with Erskine Bowles to the deficit reduction commission (often called Simpson-Bowles) which was basically ignored by everyone. He made several interesting points.

But first let me comment on the point Simpson didn’t make. As fellow blogger Eric Anderson pointed out in his commentary on the video, every time that tax increases were offered in exchange for spending cuts, we got the tax increases, but did not get the spending cuts. The main reason for this is that one Congress cannot bind a later Congress. Deficit hawks like me have every reason to be suspicious of promised spending cuts. 

Simpson also explained why Ryan voted against the final Simpson-Bowles commission recommendation. There was one specific reason. Under current law if a business provides health care it can deduct the cost of the health care from its gross receipts. Simpson-Bowles eliminated this deduction. What this would mean is that most businesses would have no choice but to cancel health care for its employees. I would. This would place many employees into the Medicaid system and overload it. The proverbial elephant in the room that no one is addressing, including Simpson Bowles, is health care.

I voted for Perot in 1992. I suggest Poirot for 2012. Simpson’s most important point is that ultimately the market will force the government’s hand. This is another ignored point that I have been harping on since the inception of the prophecy podcast blog. Governments have three basic sources of income: taxes, borrowing, and printing money. The reason we see austerity in Greece, and now Spain, is that they have no choice. They cannot raise taxes any more, nor can they borrow or print money, they have to cut spending.  Tax receipts are going down and no one with any brains will lend them money. Of course the European central bank can print money. The ECB is lending Greece money, and also it is lending to Spanish banks, who then lend to the Spanish government. Europe’s leadership is brain dead. Soon we will find out how many “little gray cells,” as Hercule Poirot would say, the America elites have. I am not hopeful.

Sooner or later the big one will come. Simpson was very pessimistic on how long we have until we “hit the wall.” He said that we could not predict the trigger that will start the next crisis—he said it could be 6 weeks, or 6 months or 3 years. I think that those of us who could be categorized as deficit hawks underestimate the time we have left. The economy is resilient. I have been saying 3 to 7 years. Japan is just now starting this process. If we repeat the Japanese scenario we have about ten years of recession before the big one hits.

My friends and readers that vote have an interesting “Sophie’s Choice.” They can vote for Romney who will decrease the economic risk of catastrophe by a few years, but increase the short term risk by war. Or they can vote for a slightly less warmongering Obama, and let the economic malaise continue unabated.

Here is Capital Account.