Take it from a Progressive Deficit Hawk: Ryan's Budget Fixes Nothing

Apr 22, 2011Bo Cutter

Ryan's budget doesn't fix the problem. Obama's budget is somewhat better. Who will take on the real problems?

So now we have a clear bond rating warning from S&P. I know that almost everyone in our current political system will flip this off. But let's be clear: Chief Financial Officers of companies are often fired if this happens, markets have become unhappy, and if you looked at the situation in which the U.S. has enmeshed itself and did not know the country was the U.S., you would agree completely with the S&P warning.

Meanwhile, let's also be clear about another thing: the budget dance the two parties are performing is not about different, even extremely different, maybe even unbridgeable views of the same impending debt/deficit crisis. This is about different views of the structure of different universes.

The Republican view of the universe (Congressman Ryan's view) is like that shortstop who can't hit but on the other hand can't field: it is completely improbable, but on the other hand it is mean spirited and crabbed. Its Medicare "cure" is deeply unfair to those who will be on Medicare in 10 years but, conveniently, avoids actually affecting anyone now on Medicare. And if we actually put this solution in place, the odds are very, very high it would cost us more, not less.

The rest of Congressman Ryan's actual budget cuts come from reducing all of the rest of government -- without specifying anything. In my blog two weeks ago, I argued that a 10 year freeze -- which everyone, including President Obama, seems to think is a fine thing -- reduced public sector investment to 5% of the federal budget. I thought this was disastrous. Congressman Ryan reduces all of my numbers by half. I don't know what is harder to believe: that Congressman Ryan or anyone else would regard these numbers as real, or that Congressman Ryan would be willing to live in the society his budget would produce.

The "savings" from Congressman Ryan's Medicare proposal and his unspecified cuts in everything else are then almost completely "invested" in tax cuts whose benefits flow hugely and disproportionately to upper income earners. As Alan Blinder showed in the Wall Street Journal Monday, a true count of the results of Congressman Ryan's efforts is as follows: $4.2 trillion in tax cuts and $4.3 trillion in spending cuts. So Congressman Ryan seems willing to wreck the safety net, our society, and maybe the economy for a net $100 billion in deficit reduction. Moreover, Congressman Ryan's own forecast of the results of his proposal has government declining as a percent of GDP to below where it was in 1950.

Where do they get these guys who either believe this stuff, or don't believe it but can say it with a straight face? I'm a proud deficit hawk, but I think Congressman Ryan's "solution" is worse for the country than the deficit problem itself.

Actually, it's pretty clear what happened. Congressman Ryan was mugged by the far right on his way to a deficit plan. By all accounts he is a decent, smart man; it is impossible for me to believe that he really believes a trivial deficit reduction is worth the damage he wreaks. Rather, in this political environment a conservative cannot put forward any new ideas.

Moving on to the Democrats. President Obama's vision for the country is vastly preferable and his budget approach more straightforward and plausible. It's just not close to being good enough. He moves tax rates for upper income families back up and he proposes to control Medicare cost increases through a series of advisory boards and regulations. He has already announced a 10-year freeze on all non-entitlement spending. So why do I have a problem with this approach? First, the tax increases will not happen; second, the Medicare cost controls by themselves won't work; third, the 10-year freeze is a bad idea; fourth, there are better choices. But his numbers actually add up and he does make a large dent in the problem. Clearly, if I only have this choice, then I would swallow my objections, which are substantial, and choose President Obama's direction.

So where does all of this take me?

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To begin with, it is impossible to imagine a budget negotiation process getting anywhere with these two competing approaches as starting points. Just what, exactly, do you trade? These are all-or-nothing proposals that are designed to not be traded. There is no sensible middle ground between these approaches; they are almost mutually exclusive.

Moreover, you have to understand how these negotiation processes work. The principals are all busy and have profoundly different levels of understanding of the substance. But all of the principals also have an acute understanding of the politics and know that in our current political environment they have very short leashes. The actual work is all done by staffs, who have little to no freedom to maneuver. There will be no new ideas introduced or creative policy breakthroughs. The result of any deal will be exactly what you might expect: a short-term fix with large amounts of imaginative fakery.

But my more fundamental concern is about leadership, government, and the phrase I used above, "if I only have this choice." Why do I only have this choice when there are better choices available?

Let me start at a different place. I think the country is in trouble. The debt/deficit issues obsessing us today are very big and very real. They have to be solved. But inequality, growth, and jobs are also going to become even greater problems over the next 20 years. If you think the country's mood is sour today, project it out after 20 years of slower economic growth and more inequality and ask yourself, how you will like it then? And remember that even under President Obama's budget directions -- by far the better of the two out there -- the U.S. government will be less and less able to do anything. And, I forgot, there is the small set of issues called environment, climate, and energy, which we have collectively decided to ignore. These issues aren't part of the left's current rant and they are either simply dismissed as a set of tree hugger myths by the right or used as an excuse to trash the environment even more.

This cannot be good enough. We have to have a more complete vision of a future America. We have to walk and chew gum at the same time. We have to solve a set of problems simultaneously. What is absolutely maddening is that there are plausible, moderate, centrist, non-extreme, affordable policies we could consider which we are either not thinking about or not thinking about seriously. Here in brief are several:

(1) Reform the income tax system for human beings and companies. Make the existing deductions more progressive by converting them into credits. Lower all rates. Introduce a "super rate" of around 30% for incomes above $1 million. (The left will hate it; the rich will pay more.) Lower corporate rates to 25%, but clean out all of the exemptions and subsidies.

(2) Raise more revenue. Introduce a progressive VAT (yes, it is easily designed) or a luxury consumption tax (about the same thing). Reduce payroll taxes a bit. Use the rest to finance a large-scale public investment program.

(3) Make entitlements more progressive and more efficient. There is no reason why there cannot be some means testing in Medicare or a moderate increase in the retirement age for Social Security. Adjust President Obama's health care plan so that there is a broader use of the exchanges -- the only chance I can see to slow the rise of health care costs is through a mix of controls of the kind President Obama has already proposed, and much greater reliance on personal choice.

(4) Trim defense. There is a huge amount we can do and still be the most powerful nation by far in the world.

(5) Commit to a 10-year program of significantly increased public investment. Spend 1% to 2% of GDP per year through a National Infrastructure Bank.

Obviously, these specifics are not my point. I already know the left and right will hate all of them. I already know that it is easy to find polls saying Americans support none of these. My points are different. None of these directions are radical, none of them would alter civilization as we know it. And none of them will be raised in any set of budget negotiations even remotely imaginable today.

The reason is simple. Our two parties have moved to the ends of the political spectrum, they have abandoned the center, their agendas have little to do with each other, and both despise compromise. And the parties' agendas also have remarkably little to do with the nation's problems. So the nation's problems are not being dealt with. Ask yourself what earthly good the budget shutdown debate over -- in the end -- about 1/39th of 1% of the budget did for anyone?

Moreover in actual elections, where an idealist -- not me -- would think ideas could be fought out, more and more only the primaries matter. On the left and right you pretty much have the true believers choosing the truest believers. At the same time, the two parties take up all of the air in the debate. No idea that is not part of the left or right canon can really ever be raised because there is no source of institutional support.

We need two things: A president who truly wants to be transformative and a centrist political force. What if President Obama -- who is going to win reelection in 2012, and will win bigger the more he takes real risks to solve real problems -- said that he was willing to negotiate without qualifications and to put everything on the table, but only with those who made the same statement? What if a centrist force led by Alice Rivlin, Peter Domenici, Erskine Bowles, and Alan Simpson also emerged that demanded these negotiations and acted as referees while they were occurring? As an American citizen, I don't want some set of completely constrained discussions to be held at some airport with an agreement to do precisely nothing emerging at the end. I want an actual deal and I want it to emerge before the 2012 elections. Why? Because if a debt/deficit deal does not happen by then, the next chance is 2017. And we do not have 5 years.

Will it happen? Are you kidding me? Of course not. We are most likely to keep kicking this issue down the road until the road dead-ends. Leadership in the country seems to consist mostly of hoping the wreck doesn't happen on their watch, not trying to stop the wreck. As I said sometime ago, "I'm gonna find my brother Mort, because he ain't never seen a train wreck."

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.

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