Economist calls budget plan a ‘near suicide pact’

NEW YORK (CNNMoney) — Nobel economics laureate Joseph Stiglitz issued a harsh indictment of the Bowles-Simpson deficit reduction proposal Monday, arguing the plan would slow economic growth and lead to a weaker America.

If enacted, the plan would be “counterproductive” and “constitute a near-suicide pact,” Stiglitz wrote in an op-ed published in POLITICO.

Just what does Stiglitz object to?

The Bowles-Simpson plan would cut defense and domestic discretionary spending, end most tax breaks while lowering rates and reduce health care spending. It would make Social Security solvent by raising the retirement age, lowering benefits on the upper end and raising taxes. It would also increase the gas tax.

But Stiglitz has his own plan. “Deficit reduction is important,” Stiglitz writes. “But it is a means to an end — not an end in itself.”

Stiglitz would instead ramp up investments in public-sector projects as a way to kickstart growth and reduce the deficit.

“Years of underinvestment in the public sector — in infrastructure, education and technology — mean that there are ample high-return opportunities,” he said.

And reforming the tax system would be an equitable way to increase revenue and close the budget deficit, Stiglitz said.

“With a quarter of all U.S. income going to the upper 1%, and America’s middle class actually facing lower incomes than a decade ago, there is only one way to raise more taxes: Tax the top,” he writes.

Policy makers should avoid removing middle class tax breaks on housing and health care, Stiglitz said. Even if phased in over time, the housing market would suffer, serving only to exacerbate the sector’s malaise.

And the government should spend less on outdated military programs — something Bowles-Simpson advocated. But Stiglitz wants further reductions.

“The Cold War ended more than two decades ago,” Stiglitz said. “But we continue to spend tens of billions on weapons that don’t work against enemies that don’t exist.”

In the long run, Stiglitz agrees with Bowles and Simpson that reducing health care costs will be the biggest challenge. And the Affordable Care Act won’t be the ticket.

“Congress and the Obama administration have not gone far enough,” Stiglitz writes, arguing that the government should more aggressively negotiate the price it pays for pharmaceuticals.

For Stiglitz, Bowles-Simpson is too much political compromise, and not enough big-picture thinking.

“We need to think about what kind of economy, and what kind of society, we want to create; and how tax and expenditure programs can help achieve those goals,” he said.