On Tuesday the dynamic bipartisan duo Erskine Bowles and Alan Simpson was at it again –releasing a new/updated set of recommendations for dealing with our debt situation. Although the exact details differ, seven of the 11 principles outlined in the summary closely resemble those given in the original 2010 Fiscal Commission Report (available here). Of interest, therefore, are the looming risks to economic stability highlighted in the four new principles. They are (the exact wording from their proposal is highlighted below in bold):
(1) the threat of sequestration (Replace Dumb Cuts with Smart Reforms),
(2) the increasing debt burden (Protect the Full Faith and Credit of the U.S. Government),
(3) the changing demographic landscape (Get Serious About Population Aging), and
(4) the rising cost of health care (Bend the Health Care Cost Curve).
There is already plenty of discussion out there regarding sequestration since its deadline looms. Here is why I think the other three are so vital for the financial future of the US.
Protect the Full Faith and Credit of the U.S. Government: In addition to the magnitude of the debt burden, the front-loaded US Treasury maturity structure is worrying (see “Treasury Maturities: The Other Fiscal Problem” by CFS President Lawrence Goodman). With a large proportion of debt maturing in the near-term, coincident timing of a Treasury rollover of that debt and a Fed exit from quantitative easing could result in the perfect storm, raising borrowing costs substantially. Put another way, one wonders whether the threat of substantially ballooning borrowing costs may limit the speed at which the Fed can raise interest rates.
Get Serious About Population Aging / Bend the Health Care Cost Curve: I’ve been quite vocal with my view that the changing demographic landscape is one of the biggest risks to global financial stability (see “The Market for Long-Term Care Insurance and Systemic Risk“). Anecdotally just consider the number of countries and corporations that have highlighted the necessity of pension and healthcare reforms – and the hostility from current and future beneficiaries that any proposed modifications generated. I’m glad to see this topic garnering greater attention – policies that address financial stability and systemic risk have implications for healthcare and vice versa. Unintended consequences can result when policy debate about one occurs without consideration of the other.
The new Bowles-Simpson proposal also contained an outline of “Four Steps to Deficit Reduction (2014-2023)”. In Step 3 they reiterate their call for adopting a chained CPI for indexing (i.e., of entitlements like social security). I continue to be concerned about how this proposal might be implemented, specifically with respect to its redistributive implications (see “Changing Inflation Won’t Solve Budget Woes“). We must be careful that such a change will still “Protect the Disadvantaged” (one of Bowles-Simpson’s earlier recommendations that was reiterated in their new proposal).
See also: “Budget Solutions: Then and Now“, by Susan Hering and Lawrence Goodman.