Ways to Come to Grips with America's Fiscal Mess

Is there any chance we can come to grips with our short-term and long-term fiscal problems--the huge current federal budget deficit and the huge looming increases in entitlement spending?

Maybe so. Or at least the chances seem a little better after the release of two sets of proposals in the weeks after the election.

One came from Clinton White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson, chairmen of the bipartisan commission Barack Obama set up in February to address the subject. Rather than wait for a consensus from their 18-member commission, the two presented their own array of proposals to stabilize the national debt at 60 percent of gross domestic product and cut the budget deficit to 2 percent of GDP by 2015.

Those changes would actually make the program more progressive, concentrating benefits among those most in need. But Democrats evidently prefer holding on to the Social Security card in the hope it will be trump in future elections.

Another came from an initiative from Clinton budget director Alice Rivlin and longtime Senate Budget Committee Chairman Pete Domenici that would similarly stabilize the national debt and would cut the budget deficit to 1 percent.

These recommendations are not likely to be adopted in full, but they do show that it is within the realm of possibility to hold the national debt below the 90 percent level to which it is headed--and that has been identified by economists Carmen Reinhart and Kenneth Rogoff as the point at which governments tend to face a financial crash.

Unfortunately, the prospects for entitlement reform still seem poor.

Incoming House Minority Leader Nancy Pelosi said the Bowles-Simpson plan was "simply unacceptable," and other Democrats indicate no more interest in making even minor modifications in Social Security--a slow increase in the retirement age, reduced benefits for high earners as the years go on--than they did when George W. Bush pushed for Social Security reform in 2005.

Those changes would actually make the program more progressive, concentrating benefits among those most in need. But Democrats evidently prefer holding on to the Social Security card in the hope it will be trump in future elections.

As for Medicare and Medicaid, they will be in play as Republicans on Capitol Hill and in state capitals try to throw sand in the gears of Obamacare. Bipartisan agreement on these issues seems far, far away.

Taxes may be another matter. Bowles-Simpson threw out a bold proposal to eliminate tax preferences--including the hitherto sacred deductions for home mortgage interest and state and local taxes--and to cut rates significantly below where they have been since World War II.

The top rate would be only 23 percent. The corporate income tax would be cut from the current almost-highest-in-the-world 35 percent to 26 percent.

The principle here is the same as that of the bipartisan 1986 tax law, that cut numerous preferences and lowered the rates as well. It was hammered out in tough and protracted bargaining by House Democrat Dan Rostenkowski, Republican Sen. Bob Packwood and Treasury Secretary James Baker.

Leading Republicans' responses to these proposals was at least somewhat positive--in vivid contrast to Pelosi. In at least some conservative circles eliminating "tax expenditures" is not seen as a verboten tax increase.

It's not clear that the lead players will step up to the plate. Incoming House Ways and Means Chairman Dave Camp does not have the experience that Rostenkowski brought to the 1986 negotiations. Senate Finance Chairman Max Baucus may not have as flexible a Republican ranking member if, as expected, Charles Grassley leaves that position and it is taken over by Orrin Hatch.

Hatch, whose seat is up in 2012, watched as his Utah colleague Bob Bennett was denied renomination this year by the Republican state convention. He may be wary that the same thing could happen to him.

Nor is it clear that Obama is interested. Voters this year were evidently not pleased with the big government policies that have raised federal spending from 21 to 25 percent of GDP. But many Democratic politicians would like to see government stay at that level indefinitely. Their ranks may include the presidential nominee who told Joe the Plumber that he wanted to "spread the wealth around."

Still, Bowles-Simpson and Rivlin-Domenici have done the public a service by showing how the current fiscal and long-term entitlement crises can actually be addressed. They have shown that it is hard--voters can't get everything they want--but that's not impossible.

Michael Barone is a resident fellow at AEI.

Photo Credit: Stock.xchng/harrykeel

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