Two Plans for the 21st Century

Anyone who follows American politics closely knows that the current mode of Washington policy making cannot last. The years of the GOP touting tax cuts and Democrats touting more spending as panaceas is ending quickly. The Obama administration's success in passing a large economic stimulus bill and landmark health care reform certainly marks the end of the era of pleasant promises.

The hard work begins, at the latest, tomorrow. New facts make new politics. The Congressional Budget Office estimates that budget deficits will average at least $600 billion each year until 2020 and even higher levels after that. That amounts to about five percent of GDP, much higher than the one to three percent of GDP that many economists say is fiscally sustainable.

Something has to give. Both parties can't avoid getting serious about cutting the deficit. President Obama understands this. That's why he pressed for a law creating a bipartisan deficit reduction commission whose recommendations would be subject to a mandatory vote on the floor of the House and Senate. Congress, still in denial, refused to go along, so Obama create a nonbinding commission via executive order.

Last week, New York Times columnist Thomas Friedman summarized Obama's plan for America's Future:

Obama-ism posits that we are now in a hypercompetitive global economy, where the country that thrives will be the one that brings together the most educated, creative and diverse work force with the best infrastructure--bandwidth, ports, airports, high-speed rail and good governance. And we're in a world with a warming climate that is growing from 6.8 billion people to 9.2 billion by 2050, so demand for clean energy is going to go through the roof. Therefore, E.T.--energy technology--is going to be the next great global industry.

So, government matters. It needs to be incentivizing businesses to build their next factory in this country--at a time when every other nation is throwing incentives their way; it needs to be recruiting highly skilled immigrants; it needs to be setting the highest national education standards and funding basic research; it needs to be laying down the right energy regulations that will stimulate more clean-tech companies.

Obama has a plan for us. The problem, Friedman notes, is that paying for all this in the era of mammoth deficits is extremely problematic, and Democrats have not provided those details yet. Hence Obama's call for a deficit reduction commission.

Friedman then accuses the GOP of failing "to spawn an agenda for the 21st century." That's a bit of a bum rap. It is true that party leaders haven't endorsed one, and any proposal that will serve as the "GOP plan" will probably be presented next by Republicans' 2012 presidential candidate.

But it is wrong to call the GOP brain-dead. Representative Paul Ryan, a Wisconsin Republican who is the ranking member on the House Budget Committee, recently released the second version of his "Roadmap for America's Future." GOP congressional leaders haven't endorsed it, but party luminary Karl Rove has. White House and Democratic congressional leaders have vociferously attacked Ryan's plan. That's because its provisions are quite controversial. But it is an agenda for the 21st century that deserves serious consideration.

Ryan's plan attempts a comprehensive solution to several interrelated problems. Cutting the national debt and deficit requires restructuring the health care system, Medicare, and Social Security, as well as altering the tax code. At the same time, we must find a way to ensure economic growth.

Ryan proposes "free market" solutions to health care in which the government would subsidize individuals as they buy insurance. He would eliminate employer-based tax advantages for medical plans. Medicare would be transformed into medical vouchers allowing everyone covered in the future to purchase their own insurance. Social Security would become a system of personal investment accounts like those proposed by President Bush in 2005. The tax system would feature two income tax flat rates--10 and 25 percent--and elimination of the corporate tax rate. All other tax deductions, including the popular home mortgage deduction, would disappear.

The CBO, in assessing the plan, estimated that the plan would drop federal spending to 13.8 percent of GDP, create a massive budget surplus of 5 percent of GDP and dramatically reduce the national debt.

Ryan's is a long-term plan worth debating. It will shave many government benefits, and put more responsibility on individuals to figure out their own retirement and health care funding, including less educated and older Americans for whom this will be a large challenge. Ryan's tax system would probably increase income inequality. But it would move us much closer to a solution of the fiscal problem.

We need to consider the two paths before us. One, the Obama plan, embodies much governmental spending and regulation and must inevitably entail very large tax increases, along with some benefit cuts, to pay for programs over the coming decades. Ryan has proposed a small government alternative that would reduce government benefits more drastically and probably increase income inequality, while doing much to solve our giant fiscal problems.

The "new facts" of fiscal restraint are forcing us to think of the long term. How big should government be? What can we realistically afford in the 21st century? And--crucially--what approach will ensure long-term economic growth? Let the debate begin. Better late than never. Tomorrow starts now.