James Pethokoukis

This graphic from the good folks at Hamilton Place Strategies adds some perspective on the billions and trillions at play:

Philip Klein, now at the Washington Examiner, scores a great scoop today with a peek at how the House Progressive Caucus plans on responding to the Ryan Path.  The liberal blueprint claims to balance the budget by 2021, mainly through a laundry list of tax increases that would raise government revenue as a share of GDP to a record high of 22.3 percent — four points higher than the historical average. (This also assume the tax increases have zero impact on growth.)

But the fiscal problem is not merely making the numbers balance out over ten years, but also over the rest of the century. That will require spending less on entitlements and more economic growth. But this plan does give insight into the sort of budget Washington liberals would prefer. Here is Phil:

Overall, taxes would rise to 22.3 percent of the economy, compared with 18.3 percent under the Ryan proposal.

The plan would also build on Obama’s most notable initiatives. It includes an additional $1.45 trillion in economic stimulus spending. On health care, the plan would add a government-run plan, or “public option,” to Obamacare and have the government negotiate drug prices.

Yet while other parts of government would grow, the defense budget would be gutted. The proposal would “reduce baseline defense spending by reducing strategic capabilities, conventional forces, procurement, and R&D programs.”

If liberal activists and Democratic lawmakers rallied around this plan, or something similar, then there could be an honest debate contrasting Ryan’s vision of lower taxes and entitlement reform with liberal plans to raise taxes, slash the military and further expand the role of government.

Is Rep. Paul Ryan’s “Path to Prosperity” potentially the most important and necessary piece of economic legislation since President Ronald Reagan’s tax cuts in 1981? Quite likely. The blueprint embraces free markets and individual choice to radically reshape America’s social welfare state for the 21st century and shrink government. Instead of looking for ways to finance an ever-expanding public sector, it would prevent Washington from growing to a projected 45 percent of GDP by 2050 (vs. 24 percent today) and instead reduce it to just under 15 percent by that year. Ryan would downsize government to its smallest size since 1950 and prevent the Europeanization of the American economy. The Ryan Path embraces dynamic growth, not managed decline and stagnation.

But what’s really important is that it affirmatively answers three questions: First, does the Ryan Path put the federal government on a sustainable fiscal path? Second, does it promote more economic growth and higher incomes? Third, is it politically realistic? Let’s take those one at a time:

1) Does the Ryan Path put the federal government on a sustainable fiscal path? Yes. It’s easily superior to President Obama’s 10-year budget plan which would generate average annual deficits of $947 billion and let debt as a share of the economy rise to a dangerous 87.4 percent from 62.1 percent in 2010. And Obama does nothing to alter the long-term fiscal glide path into insolvency.

By contrast, the Ryan Path would see debt-to-GDP peak in 2013 at 74.5 percent and fall to 67.5 percent by 2021, then continue to steadily decline until the entire federal debt is eliminated in the 2050s. Medicaid spending for the poor would be sent to the states in a fixed lump sum indexed for inflation and population growth. Medicare spending for seniors would be transformed into a system where recipients would choose among private plans, aided by a government subsidy that would grow more slowly than healthcare price increases. Indeed, the market-based plan would help lower healthcare inflation.

2) Does the Ryan Path promote more economic growth and higher incomes? Yes. Ryan uses extremely cautious economic growth figures, the same ones employed by the Congressional Budget Office, to arrive at his budget totals. But his plan would almost certainly result in higher growth and more jobs — generating more tax revenue and reducing debt even faster than Ryan estimates. It shifts vast resources from the public sector to the far more productive private sector. It also sharply reduces top federal individual and corporate income tax rates to 25 percent from 35 percent. (The U.S. currently has the highest corporate tax rate among advanced economies.) According to the Heritage Center for Data Analysis, the plan would create nearly a million new private-sector jobs next year and bring unemployment down to 4 percent in 2015. A flat tax on income and consumption would be even better, but Ryan significantly moves the ball forward.

3) Is it politically realistic? The risk is that Paul Ryan has created a plan only Paul Ryan can sell with his passion and deep expertise. He does make political concessions. The plan doesn’t, for instance, cut Medicare spending on current retirees or older workers. But austerity of that sort probably isn’t needed yet. Current trends, though, are leading toward a fiscal crisis that would result in both extreme and immediate benefit cuts and higher taxes.

And that, ultimately, is how the political case is made. The alternative to the Ryan Path isn’t the fiscally unsustainable status quo, but a future of harsh austerity beset by financial crisis, stifled by higher interest rates and marred by a lower standard of living. In short, the death of the American Dream and  the collapse of any social safety net.

But there is a way forward to another American Century and away from that nightmare. And Ryan has found it.

President Barack Obama should get in a New York state of mind. Over the weekend, Andrew Cuomo, the Democratic governor of the Empire State, struck a deal to balance the budget without major tax increases – and five days ahead of deadline. It’s the latest example of how left-of-center politicians, often considered profligate, are better sometimes placed than conservatives to cut spending. Obama is missing a “Nixon to China” moment on dealing with America’s dangerous budget deficit. Consider the following:

1) During the rare times when lawmakers attempt a measure of fiscal responsibility, liberals, generally speaking, prefer to close deficits by raising taxes while conservatives favor reducing spending. But when the spenders do the trimming, it can provide greater confidence to interest groups and voters that the cuts are rational and reasonable. And budget-minded liberal leaders can keep their free-spending legislative allies in check.

2) The phenomenon is global. Starting in 1984, New Zealand’s Labour party slashed the government’s share of GDP by 40 percent over the course of a decade. From the mid-1990s through the mid-2000s, Canada’s Liberals cut federal spending by a third, helping reduce the nation’s debt load from 68 percent of output to 39 percent. Around the same time, Bill Clinton, a Democrat, reached an agreement with congressional Republicans to balance the U.S budget for the first time since 1969.

3) Cuomo could have followed his party’s playbook. In Illinois, Governor Pat Quinn, a Democrat, rammed through dramatic increases in individual and corporate tax rates. Instead, Cuomo opted to eliminate a $10 billion shortfall with a 2 percent spending cut. He may have been worried about his chances for 2016 presidential nomination, but the state’s competitiveness also will have been a consideration.

4) Obama’s decisive moment was last December when his debt commission released its austerity recommendations. But the president has neither embraced that agenda nor given support to a bipartisan group of senators pushing the panel’s plan. Without Obama’s explicit backing, Capitol Hill Democrats will almost certainly kill the effort because it slashes entitlement spending.

When House Republicans come out with their 2012 budget in the coming days, the president may have his final chance to push a comprehensive fiscal reform plan. If Obama’s not careful, it could pass him by in a New York minute.

I partially agree with Philip Klein of the Washington Examiner:

As everybody who studies the federal budget knows, the true drivers of our long-term debt are entitlement programs. Under President Obama’s proposed budget, so-called “mandatory spending” on programs including Social Security, Medicare and Medicaid would approach $3.5 trillion by 2021, according to the Congressional Budget Office, representing roughly 60 percent of that year’s federal spending.

So the question facing conservative activists is whether to focus all their energies on the short-time budget fight that deals with $61 billion in cuts over the next several months, or place more emphasis the next fight that could affect spending for decades to come.

There’s nothing wrong with making gradual-but-sustained progress on an issue.  But don’t underestimate the important of cutting discretionary spending. If such spending were rolled back to 2008 levels, frozen for a decade and then allowed to increase at 3 percent a year, the long-term savings would be equal to long-term Social Security deficit.

The U.S. lawmaking process is completely rigged toward favoring increases in federal spending rather than cuts. Sen. John Thune recently introduced a bill that would go a long way in tilting the playing field back the other direction.

Another good idea comes Orrin Hatch, the Utah Republican, and Mark Udall, a Colorado Democrat. They want to create a bipartisan Committee to Reduce Government Waste. A better name would be the Anti-Appropriations Committee. Its raison d’être would be finding and eliminating inefficient and duplicative government programs, like those the government’s chief auditor recently identified. A few thoughts:

1. It’s an old idea, but a good one. The committee’s model is the Joint Committee on Reduction of Non-essential Federal Expenditures, started in 1941 by Sen. Harry Byrd who objected to paying for America’s war effort by raising taxes. In its first three years, the panel claimed credit for some $2 billion in savings, equivalent to perhaps $25 billion today.

2. Under the Hatch-Udall bill, the committee could fast-track its annual recommendations to the Senate floor. Perhaps an even clearer mandate would be to give the panel a specific goal, such as finding cuts equal to some percentage of the previous year’s deficit, as Thune suggests in his bill.

3. But establishing an anti-appropriations committee would be just a first step. Another could be setting budgets for two years rather than one, giving Congress more time to craft and monitor fiscal plans. Lawmakers, after all, have only met the current annual budgeting deadline in four of the past 34 years. Other potential reforms would make it harder to skirt restrictions by labeling outlays as emergency spending.

Bottom line: Of course, none of this avoids the broader need to whittle down America’s long-term healthcare and retirement obligations. But new structures that emphasize discipline could put Congress a bit more in the mood to save rather than spend.

Sen. John Thune isn’t running for president (at least this time around), choosing instead to fight big, wasteful government from his outpost on Capitol Hill.

He’s just reintroduced a sweeping budget reform bill that would make it easier to cut discretionary spending and bring some honest accounting for so-called entitlements. I chatted with the South Dakota Republican earlier today about his bill and the current budget debate. Some excerpts:

First, will the Senate come close to matching the 2011 budget cuts passed by the House?

I hope we can, but it’s really hard to handicap that one because the Democrats haven’t put anything out yet and the president has gone radio silent. I think what Democrats may do is come up with something along the lines of the president’s [discretionary spending] freeze proposal and maybe start there. But I think the Republican House level was reasonable and something we should try to get to in the Senate.

How about raising the debt ceiling?

To attract any Republican votes to a debt ceiling increase, you’re going to have to come up with some serious spending reductions and some budget process reforms. There is going to have to be a significant incentive.

How would the budget process be different under your proposal? Would it have affected the passage of healthcare reform?

It would make it more difficult to abuse the emergency designation which is how a lot of spending has been put through the last couple years. They just waive pay-go and declare an emergency. There’s a lot of abuse of the rules we have today. Clearly what we’ve been doing doesn’t work. We’ve only had four years in the past 34 when all the appropriations bills have been passed on time.

[Regarding healthcare], what we do is prevent the double counting of trust fund revenues, which is how they were able to fund [the plan]. [Democrats] were able to say they were extending the lifespan of Medicare at the same time they were using Medicare payroll tax increases and spending reductions to finance their new entitlement program. So it would have dramatically changed that debate and forced them to come up with real revenue sources instead of the phony revenue sources they used.

Reuters has lots of readers outside the country who must look at this process and think it insane.

The budget process really is a national embarrassment. I was a staffer out here back in the mid-1980s and even at that time I looked at [the budget process] and thought it made no sense whatsoever. You can get through an entire year with a $3.7 trillion enterprise called the federal government and not pass a budget. And there is a pileup with trying to get through 12 appropriations bills every single year. You don’t have any oversight to make sure the money is spent wisely and well. So going to a two-year, biennial budget would help address that.

And right now the budget process actually makes it easier to spend more than to spend less, right?

There is a forward momentum to spend more. When we passed this two-week [continuing resolution] to cut spending by $4 billion, it may be the first time we actually cut spending. [My proposal] requires every budget cycle that Congress actually ratchet spending down. For the first time, [the budget process] would put a straightjacket on Congress and force it to make some of these decisions.

Reuters outlines the basics:

Playing for time to overcome a deep partisan impasse over the budget, senior lawmakers backed away on Sunday from a possible government shutdown. Washington will run out of money on Friday and non-essential services will halt unless action is taken. A short-term fix to buy time seemed increasingly likely.

Amid concern about damaging the fragile economic recovery, Republican House Speaker John Boehner said lawmakers have “a moral responsibility” to address the huge U.S. budget deficit.

“That means working together to cut spending and rein in government — not shutting it down,” he said in remarks to be delivered to a religious broadcasters’ convention. ”This is very simple: Americans want the government to stay open, and they want it to spend less money. We don’t need to shut down the government to accomplish that.”

He said the House will pass a short-term bill that will keep the government running with some cuts, Boehner said.

President Barack Obama on Saturday urged Congress to find “common ground” on spending cuts to prevent a shutdown.

“We’re very focused on trying to avoid a shutdown,” said Representative Chris Van Hollen, the top Democrat on the House Budget Committee, in a C-SPAN TV interview on Sunday.

House Republicans on Friday detailed $4 billion in spending cuts for a two-week stopgap bill, which the leader of the Democratic-controlled Senate indicated could be acceptable.

A few thoughts:

1) The temporary budget fix merely pospones the pain for a couple of weeks. House Republicans still have to deal with Tea Party members who want deep cuts and see the CR as a way of leveraging their authority.

2) There is also less fear that a shutdown would hurt Rs since many believe the public better understands the severity of budget issues than in 1996 — but this opinion is hardly unanimous.

3) As the 2011 budget battle is prolonged, more of a chance it dovetails into the debt ceiling issue making a resolution even more problematic.

The cost-cutting battle lines are drawn in the U.S. Congress. But the fight will affect only maybe a sixth of spending, with big-ticket items like defense and Social Security getting a bipartisan pass for now. Still, tackling even that small slice would save money and reassure markets. A temporary government shutdown would be a small price to pay.

Republicans, who control the House, want to cut $61 billion a year from discretionary programs, excluding defense and other security items, which depending on each politician’s chosen definition total $500 billion or somewhat more of the $3.5 trillion federal budget for 2010. Cost cuts on that scale, though, could lead to an impasse with the Democrat-controlled Senate next month. Meanwhile, President Barack Obama has called for a five-year freeze at current spending levels, saving an average of $40 billion a year over 10 years.

Neither approach would put the nation’s finances on a sound footing. Even hacking at defense spending would only help for a while. What’s needed is a real effort to tackle future spending on Social Security and government healthcare programs. And anyway, even if an aggressive plan like that put forward by House Budget Committee Chairman Paul Ryan came to pass, spending on these so-called entitlements would still most likely rise before it started falling.

But this key: Controlling discretionary spending therefore still has a role to play, and the reductions being proposed by the House GOP could be the start of a sustained effort. Cuts in this area could be faster off the mark, as evidenced by both Republicans and Obama showing willingness to consider them. Moreover, an initial taste of austerity, even if it looks modest, would compound into big future gains.

Suppose non-defense discretionary spending was cut, frozen for 10 years, then increases at the 2.7 percent annual rate normally assumed by the Congressional Budget Office. Compare that to the case where there’s no cut and no freeze and the cost just goes up every year. The present value of those savings over 80 years isn’t too far off the estimated $8 trillion present-value shortfall in Social Security funding, according to calculations from the e21 think tank.

That suggests that cuts in discretionary spending could ultimately be almost as important as Social Security reform. The coming fight, if not quickly resolved, could leave the government forced to close its offices for a while. But if those are the stakes, it could be worth a brief involuntary holiday for bureaucrats.

Americans need to fully grasp just how scary dangerous the nation’s debt problem really is. Washington sure won’t deal it unless given a firm shove by voters. The tea party needs to get a lot bigger.

So President Barack Obama does them no favor by downplaying debt interest costs to make his budget look better. While his focus on the “primary deficit” — the budget shortfall not counting debt payments — can provide a helpful fiscal snapshot, it ultimately misleads as to the true scope of the challenge.

Obama certainly isn’t the first president to try and put a favorable spin on some unpleasant financial numbers. George W. Bush, for instance, consistently neglected to include the cost of the Iraq and Afghanistan wars when submitting annual defense budgets to Congress. And recall that Bill Clinton loved to crow about putting Uncle Sam back into the black. But his surpluses would have mostly vanished if he, as continues to be the custom, hadn’t been quietly borrowing excess funding from the Social Security trust fund.

In his new conference last week, Obama stated that by the middle of the decade, his just-released budget would “not be adding more to the national debt. …  We’re not going to be running up the credit card anymore.” Yet from 2015 through 2021, the Obama budget would add $4.7 trillion to the national debt. And public debt as a share of the overall economy would rise to 77.0 percent from 76.1 percent.

But the president tossed in a qualifier: “Our annual spending will match our annual revenues.” Well, that clears things up. If you don’t count $3.7 trillion in interest payments as part of spending, the budget is balanced in 2017 and then slowly builds a tiny surplus.

The technocrats at the IMF would surely applaud. They view elimination of primary deficits —  by balancing revenue and regular spending — as a key first step to restoring fiscal health for heavily indebted nations.

But America needs to take many more steps. Obama’s primary surpluses will quickly disappear in coming decades as government healthcare spending explodes.  And if the economy grows a bit more slowly than what White House economists now forecast – say, more like the predictions from the Congressional Budget Office – Obama’s primary deficits would never disappear at all.

It also seems risky to downplay interest costs when America’s finances are more vulnerable to interest rates than those of many nations because it has to refinance its debt relatively frequently. Through September, according to the IMF, the typical maturity on U.S. debt was 4.7 years against an average of 7.1 years for advanced economies. The UK’s average was 13.3 years, with Germany and France at about half that. Even troubled Greece and Portugal borrow for longer, on average, than the United States.

Meanwhile, total federal debt net of what’s held in government accounts is currently running at 62 percent of GDP and is forecast in the budget to reach 77 percent of GDP in 2021. Mr. Market, in the form of bond investors, isn’t yet making big enough waves to force politicians to act.

Obscuring the difference between fully balancing the budget and a somewhat less disciplined approach may help ensure voters won’t, either. Unfortunately, Obama’s new attentiveness to the primary deficit looks like a political dodge.