U.S. Crash Looms Without Roadmap Directions

U.S. Crash Looms Without Roadmap Directions: Caroline Baum

Commentary by Caroline Baum

July 8 (Bloomberg) -- The U.S. debate over more government spending versus fiscal austerity is captivating the nation’s capital, dominating the airwaves and providing the best excuse in at least a millennium to recycle St. Augustine (“Lord, make me chaste, but not yet”).

What it has failed to do, with rare exception, is produce any viable alternatives. The choices are warmed-over Keynesian pump-priming or “passively waiting for disaster,” as Harvard University historian and business school professor Niall Ferguson put it on the July 4 edition of CNN’s “Fareed Zakaria GPS.”

There’s got to be a better way. And there is. Ferguson advocates “radical fiscal reform” to address America’s entitlement problem -- Medicare and Social Security will eventually consume the entire federal budget -- and simplify the tax code by introducing a simple flat tax and a lower corporate rate.

“It’s pretty radical,” Ferguson told Zakaria. “It has almost no congressional support. But it is an option that we should be discussing much more seriously.”

At least one congressman is doing just that -- and learning how lonely it can be crusading for real change. Paul Ryan, Republican of Wisconsin and ranking member of the House Budget Committee, introduced his “Roadmap for America’s Future,” version 2.0, in January. (He proposed his first Roadmap in 2008.) President Barack Obama called it a “serious proposal” when he dropped in on the House Republican retreat.

Solid Report Card

Compared with the current fiscal crash-and-burn trajectory, the plan reduces deficits and debt, putting the federal budget on a sustainable path; results in stronger per-capita economic growth; puts Medicare and Social Security on a sound footing; and lowers health-care expenses while reducing the number of uninsured.

And that’s not Congressman Ryan talking. That’s the assessment of the non-partisan Congressional Budget Office, which gave the Roadmap a test drive and found that it performed well.

Ryan calls his Roadmap a prosperity plan, not an austerity plan that slashes benefits to the sick and needy and imposes growth-killing tax increases. Anyone 55 and older will remain in the existing Medicare and Social Security programs. For those under 55, benefits will be means-tested and health-adjusted: The poor and sick will get more than the wealthy and healthy. Even an individual’s initial Social Security benefits would be “progressive,” with more generous wage-indexing retained for low-income workers. The retirement age would increase gradually, as it should with longer life expectancy.

Empowering Individuals

What’s more, individuals would have the option of investing a portion of their payroll taxes in personal-retirement accounts that they can pass along to their heirs.

Those qualifying for Medicare would be given a voucher to purchase health insurance, letting market forces create competition and lower costs.

The same goes for Ryan’s “patient-centered health-care reform.” Increased transparency would let consumers of health care get a better sense of what things cost and what they’re getting for their money -- before they get sick. The Roadmap provides a refundable tax credit and eliminates the tax exemption for employer-based health care.

The best part of Ryan’s plan relates to taxes. Taxpayers would get to choose between filing their taxes the old-fashioned way (devoting endless hours to complying with or gaming the tax code, or paying someone else to do it for you); or they can file their return on a post-card equivalent, paying one of two flat rates with virtually no deductions or exemptions. I know which one I’d choose.

The Roadmap would eliminate the alternative minimum tax and replace the corporate tax with an 8.5 percent business consumption tax, making the U.S. more competitive globally and spurring faster growth.

Room of No-Shows

Ferguson said when he was invited to a dinner in Washington for folks committed to fiscal reform, he wondered “how big a hotel” it would take to accommodate all the interested parties. Three congressmen showed up, he told Zakaria.

“I’m depressed how few people in Washington are prepared to talk about this option,” he said. “It seems to me actually our best hope.”

It is. So why is there so little inside-the-Beltway enthusiasm outside of Ryan’s 12 co-sponsors in the House and a handful of reform-minded individuals in the Senate? Where is the courage to confront, and solve, this country’s real, intractable fiscal problems? In its latest budget outlook, the CBO warned that federal debt could reach 185 percent of gross domestic product by 2035.

Status Quo Ante

Instead of engaging in meaningful discussion of Ryan’s or alternative Roadmaps, lawmakers are teeing up the same old debate over more government spending, the effect of which is highly questionable (and that’s being generous); and draconian spending cuts and tax increases, which are never fashionable in an election year, nor a good prescription for a weakened economy. (Come to think of it, there’s never a good time for the political class to impose discipline.)

Our elected representatives continue to sidestep a real fiscal fix, hoping U.S. Treasuries will be perceived as the least-bad option by international investors for a while longer.

The other conclusion is even less palatable. Congress may prefer the status quo, using a loop-holed tax code to reward favored constituencies in exchange for campaign contributions that ensure lifetime employment.

Can there be a better argument for radical fiscal reform?