Reich Takes on Simpson – And We Do the Fact Checking

Robert Reich
Alan Simpson

This article is part of our Schwab IMPACT 2016 Special Coverage this week. More articles are listed below.

Robert Reich, a prominent Democrat, and Alan Simpson, a distinguished Republican, engaged in a friendly debate to discuss issues that they said were not addressed during this campaign season. But on crucial subjects, both relied on out-of-date and inaccurate reasoning.

The debate, which took place yesterday, was a keynote presentation at the Schwab IMPACT conference, held in San Diego. It is the largest conference in the industry, attracting approximately 2,000 advisor attendees.

Reich is a political commentator, economist, professor and author. He served in the administrations of Presidents Gerald Ford and Jimmy Carter, and was Secretary of Labor under President Bill Clinton from 1993 to 1997. He is a professor at the University of California, Berkeley.

Simpson served from 1979 to 1997 as a Senator from Wyoming. In 2010, Simpson was appointed by President Obama to co-chair the National Commission on Fiscal Responsibility and Reform with Democrat co-chair Erskine Bowles of North Carolina.

I’ll look at the positions they took on key issues and provide my own comments to highlight their factual errors.

Budget deficits

Simpson claimed that the biggest unaddressed issue was the federal debt, and reminded the audience that he wrote a report with Erskine Bowles about how the country was “going broke and needed shared sacrifice to save itself.” The reaction to the Simpson-Bowles recommendations, he said, was that “everyone ran for the exits.” Simpson claimed that two-thirds of the American budget is not being addressed – it is the cost of healthcare and is “on autopilot and cannot be stopped.”

Reich agreed with Simpson on the dangers posed by the federal debt. He said that the U.S. debt-to-GDP ratio is about 75% - “that’s high but not as high as after WWII – and is being driven by aging baby boomers and healthcare costs.” When those two forces converge, he said, “there will be a debt explosion.”

Reich was a trustee of the Social Security and Medicare systems. He said that Medicare is the big problem, and that Social Security can be fixed “without dramatic changes.”

The view that the U.S. faces a debt crisis was popularized by Reinhart and Rogoff in their book, This Time is Different. But it is by no means the consensus view. At no time in history has a country with the reserve currency defaulted on its debt or faced a sovereign debt crisis. Both the U.S. (as Reich noted) and the U.K. (prior to the Industrial Revolution) have had much higher debt-to-GDP ratios than the U.S. does now, and in both cases periods of extraordinary growth ensued. Moreover, many prominent economists argue that the federal government should run a permanent deficit, and that federal surpluses must be accompanied by private-sector deficits (e.g., lower profits for corporations). Neither Simpson nor Reich acknowledged those facts.