Posted: September 19, 2010
American politicians have carved out consequential public careers from a variety of starting points, including military service, business success, entertainment, and professional sports. The obscure position of ranking minority member of the Committee on the Budget in the House of Representatives, however, has never been any kind of launching pad. Until now. Paul Ryan, a Republican completing his sixth term in Congress from southeastern Wisconsin, has used that post to establish himself, at age 40, as one of Washington's most prominent and important conservative politicians. Ross Douthat of theNew York Times recently called Ryan one of the few Republicans in Washington "worth taking seriously on substance."
Part of Representative Ryan's sudden prominence derives from his ability, increasingly rare in Washington, to be serious about public policy without being strident about partisan politics. Even Jonathan Chait, whoseNew Republic blog is, like most blogs, more reliably strident than serious, complimented Ryan as "a cheerful and courteous man who gives every sense of wanting to deal in good faith." Chait presented this bouquet after cheerfully, courteously asserting that Ryan's ultimate political goal is to "liberate the lucky and successful to enjoy their good fortune without burdening them with any responsibility for the welfare of their fellow citizens."
Good cheer and good manners can carry a politician only so far, however. The bigger reason for Ryan's rise from obscurity to importance is that the issue he is most serious about—deficit reduction—is an issue about which Americans are growing increasingly concerned. The NBC News/Wall Street Journal public opinion survey in May 2010, for example, showed that 20% of Americans considered "the deficit and government spending" the nation's highest priority, while another 16% called it the second-highest. As recently as January 2010, more Americans had wanted the government to concentrate on both health care and national security than on the deficit. By May, even as a grim recession dragged on, only "job creation and economic growth" preoccupied the public more than the growing federal deficit. Not since anger over Washington's fiscal ineptitude secured 19% of the 1992 presidential vote for the decidedly odd Ross Perot have fiscal issues been so politically combustible. "There's no question that people are almost as concerned about the deficit and government spending as about jobs," the Democratic pollster Mark Mellman told the Los Angeles Times in June. "It is not just about the actual dollars—it is a metaphor for wasted money and lack of discipline and long-term economic decline."
The federal government is indeed relying on borrowed money to pay for its operations to an unprecedented extent. The economist Donald B. Marron recently laid out the crucial facts in National Affairs:
- In 2009 the federal government spent $3.5 trillion and received $2.1 trillion in revenue. The $1.4 trillion it borrowed to make up the difference represented 40% of federal spending and 10% of the nation's economic output.
- "America's publicly held debt now totals $7.5 trillion, about 53% of gross domestic product—the highest it has been in more than 50 years"—that is, since the huge debts incurred fighting World War II were paid off.
- Even with the optimistic assumptions that the current recession ends soon and the coming decade does not see another, the Obama Administration forecasts federal deficits that "average more than $1 trillion annually for the next ten years, amounting [each year] to more than 5% of GDP."
- "By 2020, the United States would owe more than $20 trillion, the equivalent of about 85% of GDP. At that point, interest payments alone would consume about $900 billion a year—almost five times as much as they did in 2009."
- In the more distant future, the retirement of the baby boom generation will cause federal outlays on Social Security, Medicare, and Medicaid to increase from 10% of GDP today to 16% by 2035, according to the Congressional Budget Office.
Not every economist believes that big deficits are a big problem. James Galbraith of the University of Texas goes so far as to insist they aren't even a small problem. The danger posed by long-term deficits "is zero," he told the Washington Post. "It's not overstated. It's completely misstated." Galbraith's argument is that if the prospect of a dramatic increase in the demand for borrowed money were a serious concern, it would already be manifested in higher interest rates—the price of borrowed money—which reflect lenders' collective assessment about where inflation is headed in the future. The fact that the current market rate for 20-year treasury bonds is only 4% proves, he says, either that fears about the consequences of growing indebtedness are overblown or that the bond markets are completely irrational.
Galbraith's economic analysis meshes perfectly with his political agenda, which is to convince the nation to "stop fretting about false problems," like the federal deficit, in order to spend billions of additional dollars on "real ones," such as unemployment and climate change. There are deeper reasons to be dubious about his assessment, however. Saying that markets are rational does not preclude the possibility that they are fallible. The 4% rate on 20-year treasury bonds would be more comforting if we hadn't so recently seen low interest rates and willing buyers for the bonds being offered by Greece's government, not to mention securities backed by the monthly payments on subprime home mortgages. In reality, most bankruptcies unfold the way Mike Campbell's did in The Sun Also Rises: gradually, and then suddenly. Urging us to disregard the cliff we're approaching, and concentrate on the fact that all four wheels are on solid ground at this moment, is an eccentric kind of prudence.
Deficits and Debts
The consensus shared by most politicians and economists is, to the contrary, that America has no choice but to get control of federal borrowing. (The awareness of that consensus is priced into the current low interest rates for long-term bonds, cited by Galbraith. The markets, in other words, are expressing current lenders' confident expectation that Galbraith's idea—that the government should keep borrowing as much and as long as somebody keeps lending—will be widely ignored.) House Majority Leader Steny Hoyer, for instance, told the Brookings Institution in March that if America failed to treat the deficit problem with utmost urgency the "extreme economic crisis" that has befallen Greece "will happen here." A few weeks later William Galston, a fellow at Brookings, wrote that "we can't keep borrowing a trillion dollars a year (and turning over a total of five trillion a year in public debt) without incurring burdensome interest payments and running grave risks." "Will our leaders," asked Galston, "summon the courage to treat our citizens as adults and level with them about what needs to be done? Our future is riding on the answer."
Marron, a member of George W. Bush's Council of Economic Advisors, offered a comprehensive list of reasons "why deficits and debt matter." It includes:
- Deficit spending hampers economic growth, because America's savings rate is too low to finance both chronic, massive public debt and the investments required for private-sector innovation and expansion.
- Raising taxes and cutting spending are unpopular, which is why paying off debts by devaluing the dollars they are denominated in is so tempting. Deficits, in other words, increase the likelihood of inflation, and even the prospect of inflation can alter economic behavior in harmful ways.
- America becomes geopolitically weaker as it relies more heavily on money borrowed from foreign lenders and governments.
- The miracle of compound interest becomes a nation's mortal enemy once it digs itself into debt. The more it borrows the higher its debt service obligations, so the more it needs to borrow. Trying to borrow yourself solvent is as futile as attempting to drink yourself sober.
- Massive indebtedness poses stark questions of intergenerational fairness. Since so much of our government spending goes to support current consumption, instead of infrastructure and research investments that offer long-term benefits, today's borrowing binge, according to Marron, "places an unfair imposition on future generations of Americans, who will sacrifice the fruits of their labor to pay off a debt they had no role in incurring."
The question, then, is on what basis America will retreat from heavy borrowing to, if not budget surpluses and the elimination of the national debt, then at least deficit levels closer to economically tolerable historical norms. Increased economic growth would be the deus ex machina that made it possible to avoid grappling with the hardest choices. The economic journalist James Pethokoukis argues, for example, that if the U.S. economy's long-term economic growth rate increased to 3.5% from the 3% rate that has prevailed since 1970, we'd be able to cover all the spending promises we've made to ourselves without raising any additional funds through higher taxes or increased borrowing. Tidy as the underlying equations may be, the problem is that nobody can find the section of the Economy Owner's Manual that tells you which dials to turn to guarantee that additional half-percentage point of economic growth. Furthermore, it seems highly probable, as Marron and many others argue, that to go on borrowing money in lieu of raising taxes or cutting spending, in the hope that faster economic growth renders such distasteful medicine unnecessary, will have the effect of reducingeconomic growth. If a 3.5% growth rate solves all our problems, a 1 or 2% growth rate turns them into catastrophes, making the spending cuts and tax increases that, ultimately, do have to be enacted bigger and more painful than the ones that could have been implemented earlier.
The Goldilocks Problem
The absence of easy fiscal choices about deficit spending means that arguments about the hard ones will dominate American politics for many years to come. Given the massive amounts of money involved, the need to venture economic projections about the distant future, and the vastness and complexity of the federal government's finances, the arguments over these hard choices will inevitably be conducted in esoteric technical terms. No matter how many competing studies and predictive models are used as ammunition in that battle, however, it will be settled on politicalterms. Liberal Democrats will strive to fill the gap between revenues and spending by increasing taxes, especially on the rich and big corporations, and reducing defense spending. Conservative Republicans will fight to keep defense spending unaffected by fiscal stringencies and seek to save money by reducing domestic spending rather than raising taxes.
America will be extremely fortunate if the world becomes so much kinder and gentler in the 21st century that a significantly diminished defense capability does not diminish our security. It will be extremely unfortunate if our people decide that the best way to avoid all the other hard fiscal choices is by hoping the world is a safe place, and reducing our defense outlays as if that wish were a clear-eyed assessment. Defense spending is a Goldilocks problem: it's ideal to get it just right, rather than have too few tanks and ships to defeat or intimidate enemies, or have too many, with the redundant ones sopping up funds that could have been put to more urgent uses by the government, or left in taxpayers' and lenders' bank accounts.
But national security is also an epistemological and risk-management problem. The future will contain too many surprises, including terrible ones, to know with a high degree of confidence the size and configuration of a "just right" defense capability. We can say, however, that though the penalty for having one more aircraft carrier than the country needs will be measured in dollars, the penalty for having one fewer than some dangerous contingency proves that we should have had will be measured in lives.
If Americans decline to deliberately increase their vulnerability in a dangerous world, then the political fights over fiscal policy will be waged between conservative advocates of lower domestic spending and liberal proponents of higher taxes. This is where Paul Ryan's "Roadmap for America's Future" comes in, and why it has made him famous. Ryan's roadmap lays out an ambitious, even audacious, plan to solve America's fiscal problems—entirely on conservative terms. The plan's details are extensive, and interesting, but the key is the larger goal the roadmap's provisions serve. According to Ryan, "The purpose of the Roadmap is to get spending in line with revenue—not the other way around." Getting spending in line with revenue means, in the words of Josh Barro and Reihan Salam of National Review, making the federal budget "sustainable on tax revenues equaling 19 percent of GDP, a rate close to the post-war average."
A Way Forward
The Ryan roadmap proposes dramatic changes in the way the government taxes and spends. On the revenue side, the guiding idea is that our convoluted tax system is economically debilitating; and the exploitation of its endless intricacies by citizens savvy and determined enough to avoid or reduce their taxes is politically debilitating. The existing tax code, says Ryan, is "needlessly complex and manipulative." His roadmap:
- Provides individual income taxpayers a choice between the existing tax system and a highly simplified code that fits on a postcard, one with just two rates—10% on income up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts.
- Replaces, in the postcard option, special tax deductions, credits, or exclusions with a sizeable standard deduction and personal exemption (totaling $39,000 for a family of four).
- Eliminates the alternative minimum tax.
- Eliminates taxes on interest, capital gains, dividends, and the estate tax.
- Replaces the corporate income tax—currently the second highest in the industrialized world—with a business consumption tax of 8.5%.
As for government spending, the core idea behind the roadmap is to means-test entitlement programs, including Social Security, and "voucherize" defined-benefit programs, like Medicare, turning them into defined-contribution programs. The changes offer an implicit swap. In their capacity as taxpayers, Americans will be rescued from decades of relentless pressure for tax increases to pay for all the entitlement promises made long ago. In their capacity as beneficiaries of big programs like Social Security and Medicare, however, Americans will have to make up for those programs' leaner budgets by devoting additional attention and private wealth to financing their lives' final chapters. The roadmap would:
- Freeze non-defense discretionary spending for ten years, and then subject it to a growth cap;
- Replace the current exclusion of employer-provided health insurance from taxation with a tax credit-$2,300 for individuals and $5,700 for families—available to all individuals to offset the purchase of a health insurance policy, the central idea of John McCain's 2008 health care proposal;
- Preserve the existing Social Security program for those 55 or older, and change it for everyone else by means-testing its benefits and extending the increase in the eligibility age, currently rising from 65 to 67, on to age 70;
- Preserve the existing Medicare program for those 55 and older, and restructure it completely for everyone else. In Barro and Salam's summary, "Instead of being put on a government-run plan, you would get a subsidy to purchase health insurance in the individual market. Additionally, the program would be means-tested (you get a smaller voucher if you're wealthier), and the eligibility age would gradually rise to 69.5 from the current 65."
A Congressional Budget Office analysis of the Ryan roadmap said that it put the nation on track to pay off the entire national debt in 2080 after two decades of budget surpluses. It predicted the roadmap would reduce federal outlays to 19% of GDP by 2020, 16% by 2060, and 14% by 2080, a level not seen since the start of the Korean War. The CBO did not pass judgment on whether the roadmap's stated goal of generating taxes equal to 19% of GDP would be met. If its tax changes cost the government significant amounts of revenue, of course, then the deficit—and debt—reduction goals would be postponed or negated. According to an estimate by the Tax Policy Center (TPC), a joint venture of the Urban Institute and Brookings Institution, the roadmap would not achieve its revenue goals, securing taxes equal to a bit less than 17% of GDP in 2020, compared to the 18.6% Ryan anticipates. The value of the difference between TPC and Ryan's revenue estimates is $500 billion for the year 2020 and $3.7 trillion for the decade it concludes.
Rather than get into a contentious, mystifying, unresolvable debate over predictions and mathematical models, Ryan's office issued a simple response to the TPC report, saying that if the two brackets and rates in the roadmap's tax system proved to generate less than the desired 19% of GDP, the thing to do would be to adjust them until that goal was met. This approach is consistent with Ryan's low-key position that the roadmap is a heuristic device, not a huge take-it-or-leave-it package deal. As he told Douthat, "I'm just trying to get this debate going.... I'm not suggesting that I have all the answers. I'm suggesting that I have an answer, and I'm hoping other people will bring their answers to the table."
Ryan's effort to bring spending in line with revenues is honest in ways that, sadly, are rare among politicians. It is, in the first place, candid about the severity of the spending reductions needed to run the federal government on taxes equal to 19% of GDP. He is not talking about eliminating "waste, fraud and abuse," or zeroing out foreign aid while leaving the big social welfare programs Americans have gotten used to unaffected. The roadmap will transform America's social contract, enshrining the New Deal principle that the nation has a collective responsibility to alleviate and prevent poverty through government actions, while stipulating that these actions should be targeted and limited, replacing the open-ended, universal approach that defines New Deal and Great Society liberalism.
Second, the Ryan roadmap is bracing in the way it faces the magnitude of America's indebtedness. The bad news it conveys is that America will have to undergo serious, painful surgeries that will leave its entitlement programs much smaller and very different from the ones people have grown accustomed to. The good news is that we will start to enjoy restored fiscal health—after three or four more painful decades. Barro and Salam point out that if Ryan's roadmap were enacted this year and all the projections on which it rests prove correct, "the public debt would grow as a share of GDP for the next 33 years, peaking at 100% of GDP in 2043. Deficits would not fall below 2% of GDP until 2051 (for comparison, from 1955 to 2004, the average budget deficit was 1.9% of GDP)." There's a good chance, in other words, that the roadmap is both a drastic plan and an inadequate one.
Third, while Ryan proposes a simpler tax system with lower rates, he eschews the usual Republican rhetoric about how tax cuts always do or necessarily will pay for themselves. The point Ryan makes clearly is one Kevin D. Williamson recently made emphatically in National Review, where he is the deputy managing editor. Williamson argues that income tax cuts donot pay for themselves—at the upper end of their self-regenerating revenue capacity, tax cuts replace, by expanding the tax base, about 30 cents of every dollar the government loses. Since 1980 Republicans have invested heavily in the hope that tax cuts would either be revenue-neutral, rendering spending cuts unnecessary, or would "starve the beast" and make spending cuts irresistible. Instead, writes Williamson, "The results speak for themselves: Tom DeLay and Dennis Hastert and Trent Lott and Bill Frist all know how to count, but, under their leadership, Republicans spent all the money the country had and then some."
It is significant, then, that the ambitious fiscal plan is rightly identified as the Ryan Roadmap, not the Republican Roadmap. The American Spectator's Philip Klein points out that Republican leaders have
tried to distance themselves from the proposal, emphasizing that while it contained good ideas, Ryan's plan wasn't the official Republican budget. In an election year during which the GOP is poised to make big gains, Republicans don't want to give Democrats an easy opportunity to paint them as the party keen on destroying Social Security and Medicare.
It is equally significant, however, that while some Democrats have praised Ryan for his roadmap's honesty, and others have gloated about the startling alterations it would make to the social safety net, no Democratic politician or liberal organization has seen fit to emulate the Ryan roadmap. Ryan wants to get spending in line with revenues, and lays out clearly what that aspiration entails. His liberal detractors want to get revenues in line with spending, but are coy and disingenuous about the consequences.
A recent editorial by former representative Barbara Kennelly (D-CT), president of the National Committee to Preserve Social Security and Medicare, makes the ultimate goal clear by its title, "Hands Off Entitlements." Preserving Social Security and Medicare does not mean adapting social insurance programs created decades ago to changing demographic, technological, and fiscal circumstances. Rather, it means treating every provision of the existing programs that provides benefits and has engendered constituencies as unalterable for all eternity. How can we afford this? According to Kennelly, by: 1) slowing the growth of health-care spending, a goal politicians and activists have been calling for and failing to deliver for ages; 2) "closing the long-term Social Security shortfall," in ways that she does not specify, but that are going to be made more difficult to attain by her insistence that "we can't afford not to preserve and strengthen [emphasis added] this basic retirement income for Americans"; and 3) "revisiting our tax priorities."
In other words, option #3 is going to be called upon to solve the bulk and probably the entirety of our debt crisis. The reassuring suggestion that a friendly visit or edifying field trip to our tax priorities will suffice is, however, wholly deluded or dishonest. Rosanne Altshuler, Katherine Lim, and Roberton Williams, researchers at the Tax Policy Center, have brought indispensible clarity to this discussion. In a paper published earlier this year, "Desperately Seeking Revenue," they address a simple question: what kind of tax increases would be necessary, with no spending changes, to reduce the federal deficits expected in the five-year period from 2015 through 2019 to 2% of GDP, as opposed to deficits in the range of 6 to 7% of GDP that are the likeliest result of leaving current tax and spending policies on auto-pilot? Deficits of 2% of GDP may not sound like a heroic or even adequate accomplishment, but they would make an important difference. Assuming the economic growth rate reverts to its historical average of more than 2%, deficits of that size would mean that the national debt would be shrinking as a percentage of GDP over that five-year period rather than increasing, giving America's economy some desperately needed breathing room.
Even to close the deficit gap only to 2% of GDP, however, will require tax increases that are, in the arcane jargon of the economics profession, very, very big. The alternatives include:
- Increasing every federal income tax rate, including those on capital gains and dividends, by 49%. The current 10%
bracket, the lowest, would become a 14.9% bracket, and the top bracket would increase from 35% to 52.1%.
- If the spirit of egalitarianism and the correlation of political forces dictate that the lowest three income tax brackets remain unchanged at 10, 15, and 25%, then the goal of reducing deficits to 2% of GDP by 2015 through tax increases alone will require that the top three marginal rates be increased to more than twice their current level: the 28% tax bracket would become a 60.8% bracket; the 33% rate would increase to 71.7%; and the 35% tax rate would soar to 76.1%. Effectively, taxpayers in the top quintile of the income distribution would be made to assume the entire burden of reducing the federal deficit.
- We could take an even more egalitarian approach, honoring Barack Obama's buffoonish campaign promise that no individual making less than $200,000 per year, or family making less than $250,000, would see any form of tax increase under his administration. To fulfill that pledge, and reduce the deficit to 2% of GDP, the 28% tax bracket remains unchanged, while the top income tax rates would increase from 33 and 35% to 85.7 and 90.9%, respectively. Without mentioning the Laffer Curve analysis of how higher tax rates eventually lead to lower tax revenues, the authors of the Tax Policy Center paper note that confining large tax increases to the top precincts of the income distribution "would impose substantial efficiency costs on the economy, raise less revenue than generated in our simple simulations that ignore behavioral effects, and meet with great political opposition."
- Curtailing or abolishing all itemized deductions, including the ones for mortgage interest and charitable contributions, would mitigate these rate hikes. But not very much. Limiting itemized deductions to all taxpayers to the dollar-value they provide to taxpayers in the 15% tax bracket would generate an additional $165 billion by 2019, 21% of the $775 billion necessary to reduce the deficit to 2% of GDP. Doing away with itemized deductions altogether would raise $296 billion in 2019, 38% of the total needed to reach the 2%-of-GDP deficit goal.
You can bet the rent—hell, you can bet the national debt—that none of these astounding tax increases will ever be enacted. But it's equally unlikely that America will completely transform its social insurance system in the ways defined by Paul Ryan's roadmap. The first result would require liberals to win a series of electoral victories that obliterate conservatism as a political force, leaving Democrats free to steer America back toward solvency by relying entirely on tax increases. The second outcome requires conservatives to drive liberalism off the American political map, leaving Republicans free to make all the social welfare spending cuts needed to reduce the deficit without increasing any taxes.
A Test of Self-Governance
If neither of these tectonic shifts happen—if the American electorate remains dubious enough about high taxes to keep conservatism viable, and apprehensive enough about a radically leaner and better targeted welfare state to keep liberalism viable—then the resolution of America's debt crisis will be a compromise incorporating both tax increases and spending cuts. William Galston contends that the only way to restore solvency and secure prosperity is through such a "grand bargain." Everyone knows what it will look like, he writes:
Relative to the current baseline, revenues must rise substantially, but in the way most conducive to long-term economic growth. Relative to the current baseline, expenditures must fall substantially, but without hurting those who are least able to make it on their own. And there is no way to do this without modifying the large programs whose mandated spending rises in response to demographic and technological change. Congressman Paul Ryan will not get his way. Nor will the National Committee to Preserve Social Security and Medicare.
The grandness of any actual bargain along these lines may be doubted. It would come as a happy surprise to most Americans if our elected officials could cobble together a solution that was neither squalid nor stupid.
We can make a safe prediction about the nature of the deficit reduction compromise that does emerge, either all at once or over the course of several years: the ratio of dollars from taxes, and ones from spending reductions, will correspond closely to the ratio of votes between liberals and conservatives in the nation at large. To the extent that the liberal enterprise dominates the coming decade in American political life, when the hard decisions must be made if they are ever to be made, tax increases will be the dominant mechanism for taming the deficits, and spending cuts will be relatively few and mild. To the extent conservatism is politically ascendant, America will scale back the welfare state first, and raise taxes only when further spending cuts prove intolerable.
First things first, however. To say that America will be irreparably weakened if it fails to re-commit to sound fiscal policies is not the same as saying that such purposeful sobriety is assured. The debt debate will be a central test of self-governance for Americans in this century. A growing cohort of critics has already begun writing obituaries for the republic, arguing that our fundamental problem is not that we don't have a government as good as our people, but that we do. We're sinking beneath the waves, in other words, because Americans are implacable children who demand an extensive welfare state and low taxes, and refuse to acknowledge that the two are irreconcilable. If that's true, if the American people really are that stubborn and unreasonable, then the country is indeed ungovernable and will borrow its way, gradually and then suddenly, into poverty, weakness, and disorder.
But maybe that's not true. Too few politicians have treated Americans as adults, capable of realizing that our social insurance system cannot, over the long haul, confer more in benefits than it secures through taxes. The growing structural budget deficit confronting America either will elicit mature leadership and followership, causing our country to align the commitments we are willing to make with the sacrifices we are willing to require—or it won't. Leaders worthy of the name must find the language that will make their fellow citizens understand the dimensions and urgency of the fiscal crisis. If their statesmanship is repudiated by voters who demand both New York City's social welfare system and Idaho's tax structure, then we'll have a compelling empirical basis for predicting what the collapse of the American experiment in self-government will look like. We should not conclude that a government of grown-ups, by grown-ups, and for grown-ups will perish from the earth, however, until we've made strenuous efforts to re-establish it.
Representative Ryan deserves the last word on this subject. Defending his penchant for offering solutions commensurate to the scope of the nation's problems, rather than evincing the courage of his focus groups' convictions, Ryan told an interviewer,
This is my 12th year [in Congress]. If I lose my job over this, then so be it. In that case, I can be doing more productive things. If you're given the opportunity to serve, you better serve like it's your last term every term. It's just the way I look at it. I sleep well at night.