Facing the dangers of the moment

President Obama has been justly pilloried for kicking the recommendations of the Bowles-Simpson commission to the gutter and submitting four consecutive bloated budgets bereft of any leadership on the imminent debt crisis that has caused the United States to lose its pristine credit rating. 

His defenders argue that his actions reflect the political climate. What combination of policy and politics should a president or candidate for president embrace in this environment?

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The policy is straightforward: Economic history shows that those countries that suffer from the “American disease” — large, exploding debt and poor growth — benefit best by keeping taxes low and reforming them to be more pro-growth, and by cutting spending. But not all spending is created equal. It is important to preserve core functions of government — such as national defense, infrastructure, education, basic research — and focus cuts on transfer programs and government employment. 

As an aside, this does not mean one can simply throw taxpayer dollars at infrastructure — these federal programs are in need of deep reforms. 

The first step to making this good politics is to make sure voters broadly understand that the status quo is dangerous to America. 

The U.S. tax code cripples the ability of the best U.S. firms to compete in growing world markets. A German firm selling in Brazil pays only Brazilian taxes. A U.S. firm pays Brazilian and U.S. taxes, up to a total that is the highest tax rate in the developed world. Our workers lose when the product of their efforts are shut out of key markets. The individual tax is riddled with social engineering, special provisions and other loopholes that undercut its ability to pay the bills and support growth. 

Reform is essential and should mean a single tax system for households and firms, with rates that are lower across the board, a broader base that raises at least as much revenue as the current multiple systems and an emphasis on encouraging saving, investment, innovation — and thus the sustained growth that is so desperately needed.

The social safety net is the red ink in the federal budget. Social Security is running a deficit of $60 billion now, and it will rise as 10,000 baby boomers enter the rolls each day. It appears “solvent” on paper only because of a planned — cruel — 23 percent across-the-board cut during the retirement years of future seniors. This year, $280 billion more went out in Medicare spending than came in from payroll taxes and premiums. Medicaid is entirely deficit-financed, and does not reliably provide low-income Americans access to necessary medical care.

In short, the safety net will implode under its fiscal weight and will not survive for the next generation of retirees and poor Americans. It is a disservice to those important groups to let the status quo continue to unravel. It is the doom of the U.S. credit rating to continue to run up the red ink. And it is dangerous to the future of the next generations to saddle the economy with a debt crisis and stick them with the bills.

Reform should begin with Social Security. Along the lines of the big idea from either the Bowles-Simpson or Domenici-Rivlin commissions, benefits should be scaled back for the affluent, raised for the poorest and indexed more accurately to inflation, among other revisions to its structure. Social Security reform would have zero impact on current retirees, eliminating the ability of liberals to hide behind the idea that reforms will hurt the economic recovery. It would take some future red ink off the table and send the message to international lenders that the United States is willing to manage its affairs — huge benefits, both.

The reform should continue by putting Medicare and Medicaid on budgets, thereby capping taxpayer exposure and creating real incentives for efficiencies in the delivery system. A good start for Medicare is the strategy of Rep. Paul Ryan (R-Wis.) and Sen. Ron Wyden (D-Ore.), which provides sensible incentives and lets seniors choose — not Congress — between fee-for-service medicine and modern, coordinated care.

Once the dangerous reality of the status quo is understood, voters will know that claiming we can keep Medicare as we know it is either disingenuous or cruel indifference. They will understand that taking Social Security off the table, as Obama did, is tantamount to saying that cutting benefits in retirement is just fine. While the specifics will differ, alternative reforms will share the fact that they are not politically toxic. Instead, more budgets devoid of real reform will be. 

The best example of this strategy is Canada, which in the 1990s had a debt-to-GDP ratio higher than 100 percent (like the United States), poor growth (like the United States) and worries over its currency (like the United States). A liberal government undertook reforms along these lines and in the process made fiscal sanity such good politics that successor governments of all stripes had to follow suit.

The next president must build his campaign around the dangers of the moment and the promise of real change.


Holtz-Eakin is the president of the American Action Forum. From 2001 to 2002, he served as chief economist for the Council of Economic Advisers to then-President George W. Bush, and from 2003 to 2005, he was director of the Congressional Budget Office.