"The Commission on Debt Reform - A Way Out of the Morass?"

Sydney M. Williams

Thought of the Day

“The Commission on Debt Reform – A Way Out of the Morass?”

April 29, 2010

There is an irony that the non-partisan National Commission on Fiscal Responsibility and Reform has been created by the most profligate and partisan President this Country has ever known. I hope he is serious and that any recommendations will be considered seriously, for there is no doubt we face a difficult future, in terms of financial obligations. An improving economy will lessen the immediate magnitude of the problem, but the underlying cause – too much spending and too little savings – remains.

The President proposed and Congress passed an $800 billion Stimulus Bill that produced debatable results. Billions of Dollars have been poured into Fannie Mae and Freddie Mac, but they have been removed from a proposed Financial Reform Bill, despite their obvious role in the collapse of mortgage markets. (Goldman may have traded these mortgages, but most were created/packaged at either of the two GSEs.) The President proposed and Congress passed, purely along Party lines, an overhaul of the health care system – 17% of the U.S. economy, the consequences of which no one knows, but, like all entitlements, will cost far more than anyone expects. The President is proposing and Congress will be considering an energy bill, which he has been careful to no longer call cap-and-trade legislation. The legislation may well help the Country become more energy independent in future years, but in the short term will raise prices. A Kilowatt of energy produced today by wind or sun costs more than that by oil or gas.

As a candidate, Mr. Obama talked of a bi-partisan “movement for change” in which citizens would organize and agitate their Congressional representatives to pass legislation. As President he has out-Roved Karl Rove. Congress and the people have rarely been in such a partisan mood.

Nevertheless, the President has created a Commission of eighteen members, which comprises six selected by him, no more than four of whom can be from one political party:

Alan Simpson – Co-Chair – former Republican Senator from Wyoming
Erskine Bowles – Co-Chair – Clinton White House Chief of Staff
Andy Stern – former President Service Employees Int’l Union
Alice Rivlin – Brookings Institute
David Cote – Chairman and CEO Honeywell
Ann Fudge – former Chairman and CEO Young & Rubican

House Republicans:
Paul Ryan – Wisconsin
Jeb Hensarling – Texas
Dave Camp – Michigan

House Democrats:
John Spratt – South Carolina
Xavier Becerra – California
Jan Schakowsky – Illinois

Senate Republicans:
Judd Gregg – New Hampshire
Tom Coburn – Oklahoma
Mike Crapo – Idaho

Senate Democrats:
Richard Durbin – Illinois
Max Baucus – Montana
Kent Conrad – North Dakota

Any recommendation from the Commission must have the backing of at least fourteen of the eighteen members, thereby guaranteeing a bi-partisan conclusion. (I would love to be a fly on the wall, as Paul Ryan and Andy Stern go at it!)

While I hope that this Commission will be able to do what no other has done, Peter Orzag comments to the Commission yesterday raise doubts: “Reining in the deficit [will] require significant changes in policy that builds on what we have done.” (Italics are mine.) If we continue down the path we are on, we are headed for fiscal wonderland. Unlike Alice, however, we will not awaken to realize it was only a dream.

Howard Gleckman, writing in yesterday’s Christian Science Monitor, said that he was “skeptical” and that it reminded him of what Dr. Johnson said of second marriages: “a triumph of hope over experience.” More seriously he suggested that the issues that need to be watched include:

1) Republicans being willing to raise taxes.
2) Democrats being willing to raise taxes on those earning below $250,000.
3) Social Security problems will have to be dealt with.
4) Medicare costs (and, I would add, those that will be incurred by the new healthcare entitlement) will have to be addressed – most likely in some form of care.
5) The “Atmospherics” – an indication that the mood will permit consensus.

Yesterday the Commission met for the first time. Co-Chairman Erskine Bowles characterized debt as a cancer that destroys what it inhabits from the inside. He pointed out that the Congressional Budget Office projects that our federal debt is on a trajectory to reach 90% of GDP by 2020, which would put us not far off the situation in Greece. And, if anything, projections from the CBO are generally more benign than reality. The Fed Chairman, Ben Bernanke, told the Commission that the consequences of failure (to put forward and execute on a plan) would be “substantial”. And Alan Simpson, the laconic former Senator from Wyoming and Co-Chairman admitted to the difficulty of the task ahead: “It’s going to be like giving dry birth to a porcupine.”

A risk, in my opinion, of the Commission is that President Obama may use any recommendations to move the economy toward a state-building enterprise rather than a free market one. However, for most of us, and certainly those of us in the investment business, we must deal with the world as it is, not the way we would prefer. Lines toward the end of John Marquand’s novel, Point of no Return, have pertinence: “…but his profession was investments which in the purest sense was only an endeavor to cut the cloth according to the situations which radicals and liberals created.”