James Pethokoukis

Meet Paul Ryan and Chris Christie, the GOP’s dynamic and dangerous duo. One is the author of “A Roadmap for America’s Future,” a bold blueprint that shows policymakers how they can shrink entitlement spending while also growing the economy. The other is the Garden State’s chief executive and YouTube sensation who’s implementing his own roadmap in a blue state drowning in red ink. Both are fighting back hard against the idea that government spending can’t be cut and thus taxes must be raised in order restore America’s long-term fiscal solvency.

Now this is the worst sort of heresy to the liberal economic intelligentsia — and mainstream media — who all pretty much belong to the cult of Adolph Wagner, a German economist who died in 1917. Wagner’s Law basically says that as a nation gets wealthier, its citizens demand more social services and bigger government. As a result, it’s far easier for government to raise taxes than cut spending. Not surprisingly, Wagnerians are enthusiastic supporters of layering a value-added tax onto the current U.S. income tax system.

Peter Orszag, the just-departed White House budget chief, is an obvious Wagnerian. He told CNN over the weekend that America cannot afford the Bush tax cuts of 2001 and 2003. None of them. Not the ones for the rich (and entrepreneurs and investors). Not the ones for the middle class. They all have to go, every last smidge of them. “We, unfortunately, can’t afford the tax cuts over the medium and long term,” Orszag said on CNN’s “Fareed Zakaria GPS” program. “We face too large a deficit out in 2015, 2018, 2020.”

Really? Really? Now let’s say all the tax cuts were permanently extended — Orszag’s nightmare scenario. According to Orszag’s old pals at the Congressional Budget Office, federal tax revenue would be 18.6 percent of GDP in 2020, 19.2 percent in 2035, 19.8 percent in 2050 and 22 percent in 2080. In other words, even with all the tax cuts extended, government revenue would still rise well above its historical average of roughly 18 percent since World War Two.

Instead, it’s historically unprecedented government spending that’s behind the projected debt explosion. As the CBO itself puts it:

As a result, revenues would grow only slightly faster than the economy, equaling 22 percent of GDP by 2080. Slowly growing revenues combined with sharply rising expenditures would create an explosive fiscal situation. Under the spending and revenue policies incorporated in this scenario, federal debt would surpass 100 percent of GDP in 2023 and exceed 200 percent of GDP by the late 2030s.

And although the Wagnerians think they are marching along with History, they somehow seem to have missed a generation of growing American skepticism about the size and scope of government, beginning with the Reagan Revolution in the 1980s. More recently, there’s been widespread revulsion at the Obama spending orgy and his monstrous deficits, evidenced by tea parties and polls today and perhaps by vote totals in November.

And the political personification of this revolt: Ryan and Christie. But for the Wagner cultists, these heretics just don’t compute. How can they be America’s fastest-rising political stars by preaching such a different truth — a message of smaller government fully in line with America’s deep values of self-reliance, private enterprise and entrepreneurism? For the Wagnerians, however, Ryan and Christie are like a nasty computer virus that threatens to overwrite America’s liberal operating system.

But the two rebels are putting the lie to such dogma. They are lighting a different way forward, one to a more fiscally sustainable and prosperous U.S. economic future.

This bit of David Brooks’ column today jumped out at me:

Paul Ryan, the most intellectually ambitious Republican in Congress … has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale. … The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk — embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order.

Me:  The “risk shift” argument is a phony one. Unsustainable social insurance programs means risk has already been shifted onto American taxpayers. The only question now is how to structure that risk. And the only way to restructure entitlement programs so they don’t bankrupt America or saddle it with sky-high taxes is a plan like that advocated by Ryan.

Over at RealClearPolitics, Rep. Paul Ryan of Wisconsin further fleshes out the emerging “free-market populism” meme beginning to emerge in the GOP:

From an ideological perspective, big government can combine with big business to advance a more progressivist society. For self-described “progressives,” the agenda is straightforward: expand government; co-opt big business; direct the capital markets from Washington to pursue “social justice.” Think Fannie and Freddie by much higher orders of magnitude.

Over the past decade, the thinking has been much less clear for conservatives. Being “pro-market” has been fundamentally confused with “pro-business.” Conservatives who came to Congress to defend and promote free enterprise have often been led to believe that pathway lies in bolstering established firms as they navigate the maze of government regulations and taxes. These instincts are correct, but the implementation is often flawed. All too often, the results of these efforts have been to exacerbate crony capitalism – erecting barriers to entry against potential competitors to firms that are currently on top.

For their part, companies seeking such protection have a right to pursue their narrow self-interest; but when these actions involve reducing open competition and transparency for short term gain, they do so to the detriment of the very free enterprise system that made their success possible.

Me: I can see this manifesting in a number of ways, from attacks on corporate welfare to more explicit calls to diffuse financial power. And it would seem to be in the sweet spot of folks like Marco Rubio, Rand Paul and Pat Toomey. This is also a group that would be willing to call for radical change in the U.S. entitlement system.

Washington doesn’t know how to handle Rep. Paul Ryan’s outline for how to balance the budget without raising taxes. House Majority Leader Steny Hoyer says the Wisconsin Republican’s plan is “unsustainable.” (Well, it makes Big Government unsustainable.) And an analysis from the Tax Vox blog takes issue with his revenue estimates.

Of course, the issue here is spending, spending, spending. The Washington Consensus is that taxes must go up, that it is not politically possible to cut spending. Ryan is trying to prove that consensus wrong with a little bit math and little bit of moxie.<

Why should Tim Geithner be so confident that America will “never” lose its AAA credit rating? The White House doesn’t currently have a long-term plan to stanch America’s fiscal hemorrhaging. Hoping and wishing for a successful deficit commission does not make a plan. The Treasury secretary’s statement sounds like one of those perfunctory defenses of the dollar.

But the so-called “Party of No” does have a plan. And Republicans may have a chance to sell it should they retake Congress. Yet even if the plan works, the financial bleeding wouldn’t stop for decades.

To be accurate, Rep. Paul Ryan has a plan. The Wisconsin Republican is a rising party thinker and odds-on future Budget Committee chairman if Republicans capture the lower chamber. The Ryan plan does eventually put America into the black without raising taxes, according to the Congressional Budget Office. This is critical since growth-killing tax increases will only make budget balancing that much harder.

How does he do it? By sharply cutting future social insurance benefits and partially shifting Americans into private retirement and healthcare plans. The new Obama budget plan forecasts a total debt-to-GDP ratio of 77 percent in 2020 (vs. 53 percent in 2009) with an annual budget gap of around 4 percent (vs. 10 percent in 2009). Talk about a rosy scenario. It assumes brisk economic growth, atypical following financial crises. It also assumes some budget cuts and tax increases that are politically unlikely. An alternative CBO forecast using — by its own admission — more realistic policy assumptions predicts a 2020 budget gap of 7.4 percent and a debt-to-GDP ratio of 87 percent.

The Ryan plan tops both. In 2020, it would have a budget gap of 3.7 percent and a debt-to-GDP ratio of 67 percent. But notice: even a plan created by a conservative budget hawk accepts abnormally high budget deficits a full decade from now. So beware of any politico selling quick fiscal fixes.

The Obama outline ends at 2020, but the CBO and Ryan plans take their forecast decades out. By 2040, Ryan still sees annual deficits of over 4 percent of GDP (and a debt-to-GDP ratio of 99 percent) before a long decline toward annual surpluses in the 2060s as spending eventually dips below tax revenue. Those numbers seem alarmingly high — though not vs. the stunning CBO forecast of a 223 percent debt ratio in 2040 and over 400 percent by the 2060s.

One can quibble about Ryan’s policy choices. Democrats might prefer more taxes and fewer spending cuts. But the essential point is that politicians will, at best, push for a slow departure from massive deficit spending. The question is whether financial markets will be patient enough to allow such a terribly long goodbye.

I recently had the chance to sit down and chat with Rep. Paul Ryan, a Wisconsin Republican and the ranking GOPer on the House Budget Committee. Ryan’s a rising Republican star (he’ll be just 40 next month), a guy some folks were pushing to be John McCain’s running mate in 2008.  If there’s a young Jack Kemp in today’s Congress, he’s it. And if you’re wondering what the 21st century Republican Party will stand for, many of the ideas will probably come from Ryan. Here are some excerpts from our conversation:

Boosting the economy

I would do whatever I could to keep tax rates low and permanent. I subscribe to the [Milton] Friedman permanent income effect. And I believe in the Kennedy-Mundell-Reagan policy mix of low tax rates and sound money. And that also means getting our debt under control.

Economic outlook

Look what’s going to hit us in 2011. We are going to have a massive tax increase on labor and capital, and the Fed for sure is going to be tight by then. We are doing kind of a cash for clunkers on the whole economy. We are pulling growth from 2011 into 2010. Economic decision makers are looking at the policy climate, and it is horrendous. Then they read the newspapers and see payroll taxes, pay or play, cap-and-trade and this uncertain regulatory environment. It’s the uncertainty tax. There is this enormous uncertainty being injected into the economy, and everybody is sitting on their hands.

Democrats

Our government is led by ideologues, and they are bound and determined to implement a social welfare state, a cradle-to-grave entitlement society, a high-tax, high-government-dependency society. And the countries that have gone down that path have higher unemployment, a lower standard of living and more economic stagnation.

If you listened to the healthcare debate [in the House], the leaders of the Democratic party, they all basically said the same thing: This is the third wave of progressivism, we are finally completing the progressive agenda with passage of this bill. They really believe they can finally transform America into something it’s not.

Value-added Tax

The VAT is coming. They just know they can’t do it before the election. My fear is that the credit markets blow up on us again, we’ll get some shot across the bow by the bond market one of these days. And if the Democrats are still in power, that will bring us the VAT. They will say they have no choice but to do it to save the creditworthiness of the government. It will kind of be like another TARP weekend where the Treasury Secretary and the Fed chairman come to Capitol Hill hyperventilating and out of that comes a VAT. Our government is premeditating a moment like that. But there is another way with real entitlement reform, real tax reform, fulfilling health and retirement security but also paying off our debts and making our economy really competitive.

A deficit commission

I think we should just do our jobs. The way this commission is going to be stacked, I fear, will be for a slow moderation in spending but a big increase in taxes. To really fix this problem, what you’ve got to do is have a defined benefits safety net with a defined contribution system on top. You could design this in different flavors, but that is the gist of what you have to do to wipe these unfunded liabilities off the books.

Financial reform

What I think we are doing here is enshrining “too big to fail” in our system and making a permanent crony capitalist system.

This  commentary from  GOP thought leader Rep. Paul Ryan of Wisconsin really sets the intellectual and political framework for where the GOP might be headed.  He goes after Crony Capitalism, the melding of Big Money, Big  Business and Big Goverment. This is what’s next. Here are some important bits:

1)  Since bringing us back from the precipice however, the Troubled Asset Relief Program [TARP] has morphed into crony capitalism at its worst. … No longer concerned with preserving overall financial market stability, Treasury’s walking around money continues to be deployed to reward the market’s Goliaths while letting its Davids suffer.

2) Washington is working hard to nationalize other sectors of our economy too. The House Finance Committee is pushing a massive financial “reform” bill, effectively creating banking utility companies. The Treasury Department has effectively nationalized the housing finance sector, with Fannie Mae & Freddie Mac demonstrating how fast big businesses, through a federally blessed and backed oligopoly, can fall. Now, on both ends of Pennsylvania Avenue, health care and energy lobbyists continue to fall over themselves to cut their deals–knowing that if they aren’t at the table, they’ll be on the menu.

3) Big businesses’ frenzied political dealings are not driven by party or ideology, but rather by zero-sum thinking in which their gain must come from a competitor’s loss. Erecting barriers to competition is a key to maintaining advantage and market share. With Washington leading the way, it makes sense for the big boys to redirect their resources to their lobbying shop and government affairs office. They’re far less interested in expanding the economic pie than with making certain that they get their slice.

4) For every encroachment into the market by the federal government–under the guise of “reform”–there exist pro-market alternatives that Republicans must articulate and passionately defend. University of Chicago’s Luigi Zingales, who has written extensively on the issue of crony capitalism, reminds policymakers that the path forward requires “adopting a pro-market, rather than pro-business, approach.”