Bloomberg News

For Deficit Talks, the $705 Billion Bipartisan Solution: View

September 13, 2011

Sept. 14 (Bloomberg) -- Much has been made of the idea of President Barack Obama reaching a grand bargain with Republicans on a deficit-cutting package. Just this week, 60 business leaders and former officials urged the congressional supercommittee to “go big” by adding trillions more to its deficit-reduction target of $1.2 trillion.

It’s a laudable goal, one we have endorsed in the past, yet with elections only 14 months off increasingly unrealistic. Instead of aiming for the sun, the White House and lawmakers should settle for a planet, even a moon. They should find the areas of agreement -- yes, there are quite a few -- and incorporate them into a package. Such a mini-deal would go a long way toward restoring faith, at home and abroad, in the U.S.’s ability to govern itself.

Many good ideas live on common ground. The Committee for a Responsible Federal Budget, part of the New America Foundation, an independent, nonpartisan policy institute, recently outlined 40-plus proposals from House Republicans and various bipartisan panels, including the deficit commission led by Alan Simpson and Erskine Bowles. They also listed ideas very nearly agreed on (until a last-minute blowup) during this summer’s debt-limit negotiations between the White House and Republicans.

Chained CPI

One such proposal involves what economists call a “chained Consumer Price Index.” The current CPI measures inflation in a fixed basket of household goods but doesn’t account for the substitutions consumers make when, for example, the cost of a steak increases but chicken legs do not. By accounting for such shopping decisions, the chained CPI would lower cost-of-living adjustments to government programs, including Social Security. The 10-year savings: $232 billion.

Several overlapping proposals would reduce Medicare costs. One would save $125 billion over a decade by gradually increasing the age when Medicare benefits begin, to 67 from 65. Another would shave off some $75 billion by discouraging overuse of the health system. (This would be done by increasing Medicare cost-sharing with a $550 deductible, a 20 percent co-payment and a cap on out-of-pocket costs beyond $7,500.) To prevent dilution of such cost-sharing incentives by Medigap plans -- the private insurance policies that cover much of what Medicare doesn’t -- first-dollar coverage could be barred at the same time, for a $53 billion savings. A final Medicare proposal would means-test Medicare to increase premiums for high-earners, trimming $38 billion.

Managed Care

There are similar, overlapping ideas for Medicaid. For starters, states could be given more flexibility to use managed care. The government could also stop paying matching funds for state taxes paid by health-care providers -- a gimmick many states use to inflate federal payments. Taken together, these reforms equal about $110 billion in savings.

Prominent members of both parties have voiced agreement on reducing farm subsidies, such as lowering direct payments to farmers and overhauling the crop insurance program, to cut $28 billion. Similarly, there appears to be bipartisan resolve to increase pension contributions by federal employees. The U.S. could save about $47 billion by increasing worker contributions and basing the benefit formula on the highest five years of earnings instead of the highest three years.

In 2009, Obama opened the door to overhauling the medical- malpractice system, a high-priority item for many Republicans who think the legal system is skewed toward plaintiffs. By deducting workers’ compensation and insurance payments from jury awards, allowing safe havens for providers who follow best practices, and capping noneconomic damages, the U.S. could save about $62 billion.

Tradeoffs

Needless to say, entitlement cuts and legal reforms do not rank high on Democrats’ priority lists. As a tradeoff, Republicans could accept an expansion of Medicaid drug rebates to the Medicare drug program, to trim $160 billion. This would require pharmaceutical companies to provide rebates to the federal government for a selection of prescription drugs.

There is little overlap between the parties when it comes to Obama’s job-creation proposal, with one big exception -- the payroll-tax cut for employers. House Republican leaders have spoken approvingly of the cut, to 3.1 percent from 6.2 percent, in the employer portion of payroll taxes, as well as the small- business tax break for those creating new jobs or increasing wages. This tax break would cost $65 billion.

Add it all up, and the 10-year savings comes to $705 billion. It’s not exactly a $4 trillion grand bargain. But it’s more than halfway to the mandatory $1.2 trillion target that the supercommittee must hit to avoid triggering automatic cuts. In a sclerotic era, that more than qualifies as progress.

--Editors: Paula Dwyer, David Shipley

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the Bloomberg View editorial board: view@bloomberg.net.


Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus