(By Thomas K. Brown) My pal Whitney Tilson is one of the most thoughtful people I know on Wall Street—he's smart, forthright, and tough-minded—so I was surprised no end when I saw that the opinion piece on deficit reduction he co-wrote for Bloomberg with Anthony Scaramucci turned out to be so light on new or workable ideas. If this is the best two of Wall Street's brightest can come up with, the country really is in trouble.
The conceit of the piece is that Whitney (a Democrat and active Obama backer) and Scaramucci (a Romney finance chair) were able to overcome partisan differences and put forth the broad outline of a deficit reduction plan that they said both sides would be able to support. Great idea. You'll get no argument here that the budget deficit and the country's mountain of debt are among the toughest problems we face. The sooner the federal government gets its finances under control, the better.
Unfortunately, it's not clear that the proposals the two have put together would either a) do much to reduce the deficit or b) get a whole lot of support, either in Congress or out of it. Take their approach to taxes. Whitney and Scaramucci (whom I'll henceforth refer to as W&S because their names are so darn long) propose a grab bag of tax hikes on "the wealthy" that you've probably already heard suggested before: everything from eliminating the cap on the payroll tax, to raising taxes on capital gains and dividends, to limiting personal income-tax deductions. I won't bore you with the argument that hiking taxes on the most productive would likely retard economic growth and so make matters worse rather than better. You've heard that argument before and either you agree with it by now or you don't. More to the point, W&S essentially concede that their tax-hike schemes wouldn't provide a whole lot of deficit reduction. "Some argue that even if these arguments are carried out, they won't be enough to eliminate the budget deficit," they write. "True, but think of the math this way: For every $1 billion not raised from the wealthy that's equal to having 1 million average American families each pay an extra $1,000 in taxes." Actually W&S's proposed hikes wouldn't put much a dent in the deficit at all. To put matters in perspective, if the government taxed all incomes over $1 million at 100%, the deficit would still be roughly $500 billion.
W&S are really making a fairness argument here, which is entirely legitimate. They feel that the wealthiest Americans should pay their "fair share." The top 1% of earners already pay 38% of taxes while taking in just 17% of income. That tax burden's not enough? Fine. What percentage is? I'll be happy to hear their answer—but as part of a deficit-reduction discussion, it's entirely beside the point.
The federal government's finances are in the sorry state that they're in, in my view because the government spends too much (and inefficiently), not because it doesn't take in enough in taxes. In particular, the only path to real, significant deficit reduction is via entitlement reform, notably Social Security and Medicare. This is not a secret. W&S admit as much. They propose, for instance, to raise the minimum retirement age to 70, which I actually agree with. When Social Security was established in 1935, life expectancy at age 65 was roughly 13 years. Now it's 18 years. So by all means, bump up the retirement age.
But the main part of W&S's plan to slow Social Security spending involves means testing the program. The richer you are, the less you'd get paid. That sounds great in theory, but is devilishly hard to put in place in the real world without inducing huge distortions. If Social Security were means-tested, the affluent would move into non-income producing investments, for instance, or move assets offshore. An alternative approach might be to means-test by looking at assets rather than income, but that would be even worse. I can't imagine a bigger disincentive to long-term savings and investment. People would end up paying a huge price in forgone Social Security payments for leading a life of prudence and thrift. A bad idea.
W&S's "plan" for fixing Medicare is even fuzzier. Here, as they note, there can be no means testing since everyone will be covered under Obamacare anyway. W&S spend roughly one half of one sentence talking about lawsuit reform and waste, fraud, and abuse before they get to the core of their proposal, which has to do with the "need to have tough conversations about how much we can spend in certain areas, without silly talk of death panels.'"
This is apparently code for cutting back on end-of-life care, and it is one of the most pernicious arguments that health-care controllers put forth. I'm surprised W&S have fallen for it. The argument goes like this: roughly one-third of health care costs are spent in the patient's last year of life. That's obviously a lot of money being spent on a doomed enterprise, so why not save the system a ton of money by not spending it in the first place?
Bull. The problem with this argument is that one doesn't know what counts as "end-of-life care" until after the fact. Often—very often—doctors will take the costly lifesaving measures of which W&S disapprove and the result will be that the patient will recover and live many more happy and productive years. That's not end-of-life care! I believe it counts as a good outcome and suspect that, should those patients be W&S's loved ones, they'd think so, too. In any event, the one-third-of-health-costs-spent-near-end-of-life number is a bogus, misleading statistic, since by definition it excludes good outcomes and skews to emphasize the bad. The arithmetical average can sometimes be a deceptive statistic. This is one of those times. Meanwhile, besides wanting to cut "end-of-life" spending, W&S have nothing to offer.
There's no doubt in my mind that serious men of goodwill can come together and work out a plan to reduce the country's fiscal deficit that's fair and effective. Whitney and Scaramucci are to be applauded for trying. Unfortunately, the plan they've come up with won't fix the problem.