In a press conference this morning, Debt Reduction Commission co-chairs Alan Simpson and Erskine Bowles scored the progress that has been made since their late-2010 "Moment of Truth" report. They also proposed a revised blueprint and timeline for some $2.4 trillion in further needed actions. (See the four-page "Bipartisan Path Forward to Securing America's Future.")
In a Q&A handout also released, the bipartisan duo promised to provide more specific proposals in coming weeks. The news foretells a heightened pace of budget-related noise soon to come from Washington. And this holds the prospect for either raining on Wall Street's parade or setting the bulls even more free.
The two political veterans defended their call for some $600 billion in Medicare/Medicaid reforms, an equal amount of net new revenue and $1.2 trillion in combined savings from mandatory spending cuts (i.e., farm subsidies, student loans and civil-service retirement reforms), a shift to a chain-weighted consumer price index for cost-of-living adjustments and "strengthened" discretionary spending caps.
More broadly, the two warned that the $1.5 trillion that President Obama and Hill Democrats are calling for "does not get the job done" in the face of U.S. fiscal and economic challenges. "Differences aren't as extreme as the rhetoric might suggest," and "an agreement is possible without anyone having to give up on core principles," they added. Nevertheless, they said that revenue "needs to be a substantial part of the solution" and said that "fundamentally, we have a spending problem -- and more specifically an entitlement growth problem."
I would note that an outcome short on near-term austerity but long on future entitlement and tax reforms would be optimal for investors -- and that's exactly what Simpson and Bowles propose. But whether they'll have much impact remains doubtful. Indeed, it's not too early to question how markets might react if lawmakers set the bar lower than discussed this morning -- perhaps before they wearily jump over and declare victory in the three-year-and-counting austerity-wave struggle as early as this summer.
The retired Republican senator and Clinton-era White House Chief of Staff credited the 2011 Budget Control Act and cuts enacted via the post-election "continuing resolutions" for some $1.85 trillion in reduced 10-year discretionary spending cuts. Adding another $850 billion from some $600 billion in upper income tax hikes and other baseline spending tweaks that were enacted as part of last month's fiscal-cliff fix, they cited some $2.7 trillion in total savings.
Nevertheless, they noted that their 2010 call for just $4 trillion in savings would better equate to the just over $5 trillion they're advocating today.
Their recommended that $2.4 trillion in additional deficit reduction would come roughly 3-to-1 from net new spending cuts and interest savings to tax hikes, which would comprise a quarter of the total, or $600 billion. This amount would represent only part of savings from comprehensive tax reform, the remainder to be dedicated toward Republicans' and purist reformers' goal of rate reduction. (This concession is seemingly designed to soften GOP resistance to any net new revenue after Obama forced Republicans to accept upper-income tax hikes as part of the cliff-fixing American Taxpayer Relief Act.) Almost on cue, however, the president almost simultaneously rejected the notion of top rate reductions for upper-income earners -- a harbinger of another partisan face-off to come.
Meanwhile, the new "SB 2" recommendations would essentially turn off the $1 trillion 10-year budget sequester but likely add back several hundred billion in discretionary budget savings to be achieved via tweaks to the baseline targets enacted in the 2011 Budget Control Act. As my partner Byron Callan notes, this would comport with consensus hopes that prevailed among many defense analysts throughout most of last year.
I doubt the proposal will move the needle much, although its characterization of spending as a bigger residual priority and its sensitivity to GOP attitudes regarding the sanctified goal of efficiency-producing tax reform could provide at least some leveling of the playing field, which has seemed skewed toward the Democrats since Election Day and the enactment of the lopsided cliff-fix just after New Year's Day. It might also serve as a bit of a reminder of the sanguine case for defense stocks, which we increasingly expect to be tested as some $45 billion to $52 billion in Pentagon spending cuts begin to take effect next month.