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Tough calls ahead for deficit commission

By David Gergen, CNN Senior Political Analyst
  • David Gergen: Commission warns another economic crisis certain if fixes aren't made
  • Gergen says one touchy issue to be confronted is how to rein in entitlements
  • Cutting defense, cuts in middle class tax breaks and tax hikes also on the table, he says
  • Gergen says co-chairmen Bowles and Simpson show courage in a thankless job

Editor's note: David Gergen is a senior political analyst for CNN and has served as an adviser to four U.S. presidents. He is a professor of public service and the director of the Center for Public Leadership at the Harvard Kennedy School.

(CNN) -- Just when we are exhausted from hard times, we have to brace ourselves for more of them around the corner.

That was the grim message this weekend from the co-captains of President Obama's deficit commission, speaking before the nation's governors in Boston, Massachusetts, and from other leaders I have met recently.

Our economic crisis may have been unpredictable, commission co-chairman Erskine Bowles told the governors, but unless we fix the nation's finances, we will experience another one that is "the most predictable in history." He expects it to strike no later than a decade from now and probably sooner.

How did we get here, asked former U.S. Sen. Alan Simpson, the other co-chairman. For the past 60 years, politicians in Congress have been trained to bring home the bacon. "Now the pig is dead," he said. "There is no more bacon to bring home."

Clearly, we have some very tough choices ahead. The 18-member deficit commission -- two-thirds of it appointed by Congress, one-third by the president -- is working hard to come up with recommendations by early December. (No one in Washington wants them before the November elections.) It's too early to know where the commission will come out or how much influence it will have -- the co-chairmen themselves say chances of success are small -- but it is already clear that the commission will present the country with gut-wrenching decisions.

Listening, and reading between the lines, here's my early take on where the commission is heading:

How do we rein in entitlements? Medicare, Medicaid and Social Security are exploding. Already, Bowles said, their costs equal all the tax revenues coming into Washington. The commission knows that Medicare is the biggest, toughest nut to crack, and it will almost certainly recommend reopening and revising the health care bill passed last year in order to bring down costs. Obama says further Medicare reform has to be on the table: But will Democrats like Nancy Pelosi agree? Will seniors? Will doctors and hospitals? Expect a firestorm.

If there is good news on entitlements, it is a growing belief in and around the commission that a bipartisan compromise can be forged on Social Security. It would probably involve another extension of retirement age -- the European Union is now recommending 70 -- an increase in Social Security taxes for the affluent, and a modest reduction in benefits. But no one should underestimate how much of a fight retirees and near-retirees could put up.

Reining in the rest of government. The costs of the rest of government have been mushrooming, too -- a recession, two wars and reckless spending will do that. But where do we cut? Bowles and Simpson would like to protect the poor, protect investments in education and infrastructure and protect national security. Still, reductions need to be found. Here are two key options the commission is exploring:

Cutting defense, starting with weapons programs that were designed for the Cold War, and possibly freezing pay for military personnel to match pay freezes among domestic civil servants. I have heard no talk about accelerating pullbacks from Afghanistan and Iraq, but one of the perils faced in the past by great nations in financial distress is to precipitously draw down their military and become weakened. How much can we prudently cut defense? Expect another big fight.

Cutting tax breaks for the broad middle class: Millions of us benefit today from a home mortgage deduction, a deduction for employers who pay part of our health insurance, deductions for charitable contributions and the like. These are officially called "tax expenditures" and together they are huge -- their total cost to the government, say commission leaders, about equals all tax revenues. Clearly, these "tax expenditures" are on the chopping block within the commission. But they are very popular and proponents say they are pillars of the country's well-being. Will they be changed? Can we afford not to change them? Another tough call.

Raising taxes: Most Republicans don't want to raise taxes at all; Democrats, including those in the White House, favor a value added tax (VAT) that is pervasive in Western Europe. Middle-class Americans think the affluent ought to pay a far higher share; the affluent are divided on how high their taxes should go and think that lower-middle-class Americans should have greater skin in the game. This struggle is sure to become more intense next year.

For now, the commission seems to be exploring a middle course. Bowles cites the decisions by the new British government under David Cameron in its recent austerity program. The Brits essentially cut out $3 in spending for every $1 increase in taxes. Bowles personally would be comfortable with a 2-1 ratio of spending cuts vs. tax increases. He is known to have an aversion to a VAT tax unless it is accompanied by serious reductions in income and corporate tax rates.

As President Clinton's chief of staff in 1997, Bowles negotiated with Republicans in charge on Capitol Hill to reach the first balanced budget in decades. That budget called for spending and revenues to both stand at roughly 21 percent of GDP.

To make the commission's recommendation palatable to all sides, Bowles, Simpson and some of their allies are thinking that a balanced budget might once again be pegged at that 21 percent mark, which would be down from roughly 25.4 percent on the spending side and up from 19.4 percent on the tax side. They would also seek a legislative cap, so that neither taxes nor spending could exceed that level of GDP unless a supermajority in Congress voted to break the cap.

Finally, commission members are anxious to make clear that they are not recommending serious deficit reductions in the midst of hard times. They do not argue for or against more job spending or more assistance to states this year. Rather, they are saying the first of their recommendations would not take place until at least 2012, when the economy should be in better shape. But they warn that we cannot postpone major deficit reductions any longer -- the danger to the country is too great.

As someone who has worked with and greatly admired Erskine Bowles and Alan Simpson over the years, I believe they deserve the enormous gratitude of the country for accepting their roles as co-chairmen of this deficit commission. They know they will become targets from aggrieved citizens, many of whom are suffering today. They know, too, that it will be extraordinarily difficult to forge a bipartisan consensus behind a plan that will require shared sacrifice.

But they also think the country is in peril -- and they are showing courage and good sense in the way they are trying to find answers. It would be reassuring if the rest of our political leaders had the guts to stand up with them.

The opinions in this commentary are solely those of David Gergen.