Awesome Baby!

Last week, Alan Simpson and Erskine Bowles rolled out their own proposal for how to cut the deficit.  This is not the Debt Commission’s proposal.  Rather, it’s the leaders’ first swing at the problem. 

Their ideas included the following (this is a non-exhaustive list):

1. Cut FY 2012 domestic spending back to FY 2010 levels and then cut it 1% each year through 2015; from 2015 – 2020, index it to inflation.

2. Cut military spending by approximately $100 billion.

3. The corporate tax rate would drop from 35% to 26%, but some deductions would be eliminated.

4. Lower personal income tax rates, but eliminate many deductions.  Individual rates would be 9%, 15% and 24% — but capital gains would be taxed at these same rates.

5. Eliminate the mortgage interest deduction.

6. Eliminate the child tax credit.

7. Eliminate the earned income tax credit.

8. Eliminate the AMT.

9. Reduce cost of living adjustments for all programs (including Social Security).

10. Retirement age would be slowly raised (with a hardship exemption for some workers).  The age would be 68 in 2050 and 69 in 2075.

11. Increase the amount of payroll subject to taxation; currently at 85% but the goal is to move it to 90%.

12. Cut the federal workforce by 10%.

13. Limit the increase in federal health spending to GDP + 1%.

14. The 18.4 cent gas tax would rise by 15 cents between 2013 and 2015.

What’s next? Now, the Commission has to battle out what their proposal will be.  The panel’s ideas have to receive 14 votes (from the 18 members) to trigger a vote in the Senate and House.

My view on what they did…awesome baby! Here’s why I love it:

1.     They were supposed to devise a plan that cuts the deficit to 3% of GDP by 2015.  Their proposal would cut the deficit to 2.2%.  (Of course, the Commission won’t agree to all of their changes – so they were smart to offer more than they need.)

2.     They have attacked from all different angles.  Everyone has to realize that no one side can have it all their way.  Spending was cut and taxes were increased.  The plan cuts $2 in spending for every additional dollar in revenue.

3.     The proposal does more than simply say $100 billion should be cut from defense spending.  It shows examples of the cuts.  It’s the same thing for defense spending.

4.     This proposal (and the lack of support that it will receive) will be further evidence of our political logjam.  At some point, it has to affect our bond ratings.  Maybe then we’ll get serious?

The Frauds Are Exposed

If we want to solve this upcoming debt disaster, we have to make huge changes.  It’s not going to come all from one side.  It’s not going to be all spending cuts and it can’t be all tax increases.  Everyone has to accept this.  Of course, the moderates seem to accept this and the far right and the far left don’t.

Here are some of my favorite comments.  First, the Democrats…Nancy Pelosi called it “simply unacceptable.”  Democratic Debt Commission member Jan Schakowsky (Rep. – Illinois) said “I think every member of the commission would agree that this is not the plan.”  Senator Durbin (D – Illinois) said that “there are things in there that I hate like the devil hates holy water.”  (I’m not sure, but I think that the devil is a registered voter in Chicago.)  The AFL-CIO President said that the plan tells working Americans to “drop dead.”

Now onto more conservative groups.  The conservative group Americans for Tax Reform said that the commission is merely an excuse to raise taxes on Americans. Some Tea Party members said that there would be a backlash against any Republican who voted in favor of any increase in taxes.

Interestingly, some of the Republican leaders said that this proposal was provocative (I think that’s fair).  Others said that it should be considered.  Overall, I think that the moderate Republicans and moderate Democrats think that this was a good start, but the extremists are providing the sound bites.  Many politicians aren’t saying anything because they think that there’s no chance that most of this will ever be enacted.

Truly amazing.  The Washington Post reported that one in four employees (i.e., staff members) of the Debt Commission are paid by an outside entity.  Many of these outside entities have a particular agenda that they are pushing.   Some are conservative groups and others are liberal groups.

Part 2: An Unrelated Matter

Moving on to an unrelated matter, but interesting all the same…

If you saw the following in a prospectus, would you buy the stock?

We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.

Our management team for financial reporting, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. On December 31, 2009, because of the inability to sufficiently test the effectiveness of remediated internal controls, we concluded that our internal control over financial reporting was not effective. On June 30, 2010 we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weakness in our internal control over financial reporting that continued to exist. Until we have been able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to accurately report our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of the Company’s various financing agreements.

If this would scare you, don’t buy GM. Of course, who would ever expect a company controlled by the government to not know how much money they have?  Go figure.