Now that we’re focused on debt, let’s make some difficult choices

It took America 193 years to run up its first trillion dollars of debt; it took us 10 months to run up our most recent.

For much of the 20th century, the United States was a production giant. We produced much of the world’s goods; we led in innovation; our service sector exploded; our middle class became the envy of the world and we became the most powerful economy on earth.  Slowly, however, we became a consumption giant. We now power the world’s economy as much by what we consume as what we make. We’ve become, in the words of Sen. Charles Schumer (D-N.Y.), “the kid with the cake mustache on his face.”

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As Americans became monster consumers, so, too, has the government. Between 1981 and 2010, the nation added $7.6 trillion dollars to the national debt. In 1990, forty-four cents of every federal dollar was spent on Medicare, Medicaid, Social Security and interest on the debt. In 2030, the Congressional Budget Office (CBO) says, sixty-eight cents of every federal dollar will go to those four budget items.

CBO now says America should expect a pathetic 2 percent real GDP growth during the next two decades — more than a full point less than the growth America experienced from 1975 to 2005. By 2020, the cumulative debt of the nation is expected to reach the level of Greece’s indebtedness relative to the size of its economy. 

Through it all, Congress has been loath to cut spending or increase revenue. And if you are heartened by the Republican’s promise on spending in the “Pledge for America,” consider this: Government outlays under President George W. Bush increased faster than under either President Clinton or the combined presidencies of Johnson and Kennedy.

There is, however, a promising path to fiscal responsibility even in this polarized political environment. It’s based on one simple and unifying concept: economic growth. 

It is unifying because America can neither achieve the middle-class standards of living we expect nor the safety net we have created with 2 percent annual economic growth. In addition, both parties at least claim to be interested in growth. And finally, the promise of future economic growth just may be the tonic the American public needs to accept the necessary cuts in entitlement spending to get the deficit under control. 

A growth-oriented deficit package could contain five basic core elements in which there is some agreement between the parties. 

The first is government reform. Government must take the first cut, and by this, we don’t mean symbolic gestures such as eliminating the White House travel office. One idea would be to restructure the way federal pensions are financed. By making employees and employers contribute equally to retiree pensions, the taxpayer would save more than $250 billion by 2030. That would prove to voters that Congress is serious about deficit reduction.

Second is Social Security. Despite the talking-points memos emanating from each side, there is not a single sentient elected official who doesn’t believe Social Security is in danger of bankruptcy. Fortunately, the solutions that many have suggested are relatively easy and gradual. A very slow raise of the retirement age, a more accurate COLA adjustment based on a better inflation measure and a small increase in FICA contributions would just about save Social Security.

Third, finish the job on healthcare-cost containment. The president’s reform package took some critical first steps, but left on the table are end-of-life care, medical malpractice reform and pay-for-performance for providers. That’s hundreds of billions in savings. 

Fourth is a dramatic reduction in unnecessary government giveaways. To begin with, a three-year freeze on domestic discretionary (as the president proposed) and non-Iraq and Afghanistan defense spending would force appropriators to trim the fat out of federal agencies. Congress should also cut agriculture subsidies by one-fourth, sunset all rifle-shot tax breaks and allow amendments to cut earmarks to go toward deficit reduction. 

The fifth piece would not be deficit reduction at all, but new investments aimed to create growth. Money saved from eliminating subsidies and tax breaks would fund critical new spending such as a National Infrastructure Bank, college tuition tax credits and energy innovation — the type of investments that in the past made America the world’s leading economy.

We are at a rare moment when the public is actually focused on the deficit. But polls show they have no idea that restoring fiscal order would cut cherished programs. By structuring the deficit argument around growth and providing a blueprint to achieve it, the American people might be willing to stick with politicians who make the tough choices.

Kendall is senior fellow for Health and Fiscal Policy, and Kessler is vice president for Policy at Third Way