James Pethokoukis

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.

Congress should be looking hard at dramatic discretionary spending cuts.  It’s really gotten out of control (via the Congressional Budget Office):

Such outlays equaled about 10 percent of gross domestic product (GDP) during much of the 1970s and 1980s, then gradually fell to 6.2 percent of GDP in 1999 . Thereafter, discretionary outlays began increasing relative to GDP— reaching 7.0 percent in 2002 and 7.9 percent by 2008— partly because of actions taken in response to the terrorist attacks of September 11, 2011, and subsequent military operations in Afghanistan and Iraq. In the past few years, discretionary spending has been boosted by funding provided in the American Recovery and Reinvestment Act of 2009 and by policy responses to the recent turmoil in financial markets. Discretionary outlays rose to 8.8 percent of GDP in 2009 and to 9.3 percent last year—the highest share of GDP since 1988.

And here is what is in discretionary spending:

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.

Nick Schulz says Republicans need a broader policy portfolio than lower taxes and less spending:

Too often discussions of growth are overly abstract or narrow.  They tend to focus on a few policy prescriptions such as tax cuts or trade or education. These are important. But the discussion about growth is strangely detached from the particular and unique characteristics of the United States. Any serious growth strategy should acknowledge and leverage America’s attributes and advantages.

Nick then goes on to praise Joel Kotkin and his “continental strategy” for growth, which — best I can tell — centers around more infrastructure spending. But what is the free market way of approaching this so it does not turn into a supersized version of Boston’s Big Dig — build and privatize?

Score another one for the Tea Party:

Senate Minority Leader Mitch McConnell declared Monday that he now supports a GOP ban on earmarks, a stunning reversal that puts the Kentucky Republican in line with the tea-party wing of his party and conservative senators who have long sought to kill off pet projects. “What I’ve concluded is that on the issue of congressional earmarks, as the leader of my party in the Senate, I have to lead first by example,” McConnell said on the Senate floor. “Nearly every day that the Senate’s been in session for the past two years, I have come down to this spot and said that Democrats are ignoring the wishes of the American people. When it comes to earmarks, I won’t be guilty of the same thing.”

McConnell’s backpedal on earmarks is also a remarkable win for Sens. Jim DeMint (R-S.C.) and Tom Coburn (R-Okla.), who had been gaining ground in their effort to force their Republican colleagues to adopt an earmark moratorium.

A complete ban on earmarks would a) save some $16 billion a year, b) make it harder for the big-spenders to bribe/threaten other members to vote for more spending; and c) make life harder for lobbyists. On that last point, getting rid of tax breaks and moving to flat tax would also be a blow on behalf of good government. Here are the biggest earmarkers this year in the Senate and House: