Economics

Larry Summers spills the beans on the real reason why Obama rejected Bowles-Simpson

President Obama created a debt commission—and then rejected its recommendations. As I just wrote in a previous post, the rejection was complete and overwhelming.

And here’s my theory why: The Bowles-Simpson commission recommended a) cutting individual tax rates to as low as 23 percent and b) capping federal spending and revenue at 21 percent of GDP. Keep that in mind as you read this bit from a new op-ed by former Obama economic adviser Larry Summers:

The combination of an aging society, rising health care costs, debt service costs that will skyrocket whenever interest rates normalize, a still-dangerous world in which our allies’ defense spending is falling even as that of potential adversaries rises rapidly, and a growing fraction of the population unable to hold steady work means that in all likelihood federal spending will need to be larger not smaller relative to GDP in the future.

Summers, the White House, and left-of-center economists everywhere believe federal spending will need to be much higher in the future. And consider that it is already 24 percent of GDP and would never go below 22 percent under Obama’s new budget. Obama—if he serves two terms—would be the first U.S. president in history to spend 22.0 percent or more of GDP for eight straight years (and then beyond). Indeed, three liberal think tanks recently constructed long-term budget plans, and their average projection for federal spending by 2035 was 25 percent of GDP—with a bullet.

Bottom line: Obama rejected Bowles-Simpson because it capped spending and taxes (both revenue and rates) at too low a level for the Big Government future he envisions.

Generating the revenue Obama would need to finance all his spending would require sharply higher taxes on the wealthy as well as, most likely, a value-added tax on everyone else. This also explains why we’ve never seen a long-term budget plan from the White House. If Team Obama did offer one, the American public would see that while tax hikes would start with “the rich,” they would eventually trickle down.

4 thoughts on “Larry Summers spills the beans on the real reason why Obama rejected Bowles-Simpson

  1. Excellent hypothesis…the President and his supporters continue to say they see light at the end of the tunnel on the economy. What they aren’t telling anyone is that the light is really a freight train of debt and more spending coming in our direction.

    • Unfortunately, President Obama and the Republican hope-to-be presidential candidates all fail to see that the overriding goal should be to broaden ownership of productive capital assets (the non-human factor of production or wealth creation) simultaneously with stimulating the economy with tax incentives. Without policies and programs to broaden ownership, the productive sector of the economy will continue to be owned by a powerful minority. Obama’s policies and proposals will further this result, and will de little to benefit the economic opportunity for the 99 percent to make a good living. As technological innovation is further spurred as a result of tax incentives the result will be further job displacement as superautomation, automated factories, and other computer-controlled and operated processes accelerate. Unless the American people can own in this future growth, the American dream will be dead.

      It will perpetuate a “system” where investment is only based on savings and continue to shut out the poor and working and middle class people who are struggling to meet living needs. No where does Romney advocate a reform of the “system” to support investment incentives that stimulate economic growth while at the same time empowering the 99 percent to acquire ownership of productive capital and pay for their acquisition out of the future earnings of the capital investments.

      While tax and investment stimulus incentives are excellent tools to strengthen economic growth, without the requirement that productive capital ownership is broadened simultaneously, the result will continue to further concentrate productive capital ownership among those who already own, and further create dependency on redistribution policies and programs to sustain purchasing power on the part of the 99 percent of the population who are dependent on their labor worker earnings or welfare to sustain their livelihood. By stimulating economic growth tied to broadened productive capital ownership the benefits are two-fold: one is that over time the 99 percenters will be enabled to acquire productive capital assets that are paid for out of the future earnings of the investments and gain greater access to job opportunities that a growth economy generates.

      Capital acquisition takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time––5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.

      Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital. Note, though, millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively miniscule, as are their dividend payments compared to the top 10 percent of capital owners.

      As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security––those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.

      • @Gary, you have got to be kidding! This has already been tried, it was called communism and failed horribly. The left in this country meets Einsteins definition of insanity: doing the same thing over and over again and expecting different results…and BTW Gary there is a vehicle for broad ownership, its called the stock market and its funny how all of the former and so-called communist countries have moved to create their own exchanges.

  2. There are really very few programs the govt should be supporting. Unfortunately, democrats obsession with renewable energy has led them to sink billions into crony capatalism and to work to increase energy costs. In general, energy is not our problem.

    Dementia is. Alzheimer and related spending is currently 180 billion a year, and is expected to increase. Research into this critical area has been sporadic and disjointed, with little govt help. I generally don’t want the govt to get involved, but they need to place a 10 year, billion per year project of scholarships and research grants to combat this problem. Newt hit this as an issue, and Obama picked up on it in his SOTU address (where he pledged some piddling numbers and no real research program).

    Second is kidney disease, with almost 60 billion per year. There are small research programs that are close to creating kidneys from adult stem cell growth (meaning that no anti-rejection drugs would be required). A working transplant program using stem cell produced kidneys would likely reduce this by an order of magnitude.

    These two diseases alone are responsible for much of the future unsustainable growth of medicare spending. Both parties are fixated on solutions that ignore the looming elephant in the room, mostly because they are ignorant of the scientific advances that have been accomplished or that may be possible.

    So groups like Simpson Bowles come up with political solutions that neither party wants. The only solution is to get out of the box.

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