For decades Alice Rivlin has been an important member of the Democratic Party’s brain trust on the subject of economics.  As the former Director of the Congressional Budget Office, she was a tenacious critic of President Reagan’s economic policies.  Yet when she arrived at the debt commission’s first meeting, the elephant she clearly saw in the room was not like the Republican ones she was accustomed to slaying; it was the creation of Democrats.  Members of Rivlin’s party had agreed to White House instructions that the President’s freshly inked healthcare law should not be touched as part of the commission’s recommended reforms, and by extension, neither could healthcare entitlements, or at least not much.

Anyone the least bit familiar with the nation’s fiscal problems knows that the big medical entitlement programs, Medicare and Medicaid, along with the absurdly high costs associated with all medical care, are the biggest factors driving the coming train wreck.  The new healthcare law, passed by the Democratic Congress and backed by the President, places all future cost control in the hands of government bureaucrats.  It practically ignores market and consumer incentives, while trusting government to control costs and deliver quality based on a series of studies.  Apparently Rivlin, like a majority of Americans, is skeptical of this approach.

Rivlin, a loyal Democrat, did not break with her President or Party directly, but she was subtly subversive.   She knows that 1) the new healthcare law is fiscally irresponsible 2) that it’s  unpopular because it fails to convincingly control costs and centralizes healthcare decision-making through government control 3) without a realistic means of controlling medical entitlements, the debt bomb keeps ticking.  Rivlin’s conscience and patriotism did not permit her to sit on her hands for political reasons while the nation faces fiscal ruin.  So she cut a “side deal” with the conservative incoming House Budget Chairman and fellow commission member, Rep Paul Ryan (R-WI).

Ryan and other Republican policy wonks understand that the new healthcare law is designed, over time, to lead to a single-payer government-run healthcare system.  The legislation passed by the outgoing Democratic Congress was, for political reasons, as close as they could get to their ultimate goal of a single-payer system (For more read  here).  Republicans, with popular sentiment behind them, are determined to reverse “Obamacare,” because of its trajectory toward increasing government control.  Some Democrats, notably Senator Ron Wyden (D-OR), who had offered a market-driven, consumer-oriented health care healthcare bill, are also skeptical of their own party’s approach to healthcare reform.

In making a side deal with Ryan, Rivlin signed on to the model endorsed by Wyden and accepted by many Republicans.  It takes basically the same approach found in Ryan’s “Roadmap” (Ryan’s Roadmap is the only serious debt-reduction program put forth by any American politician, Read more here), which makes consumers responsible for higher deductibles, relies on vouchers to promote competition, and funds health savings health-savings accounts for the neediest.  (For more on the Ryan – Rivlin deal, see James Capretta here and  John Goodman’s blog here).

For transcending ideology, resisting political pressure, following her conscience, and working in a truly bipartisan fashion, Alice Rivlin is a rare present-day stateswoman and heroine.

Partially because the Ryan-Rivlin deal was separate and not part of the commission’s end product, some Republican members of the commission, including Ryan, did not vote to support the commission’s plan (for Ryan’s objections, see here ).  They were balanced on the other side by liberal Democrats, who argued that the commission went too far in cutting spending and altering programs.  One very conservative Republican, however, chose a different course.

Senator Tom Coburn (R-OK), a practicing physician before becoming a US Senator and author of his own healthcare reform legislation, has been one of the most vigorous critics of the Democratic healthcare law.  He is also one of the most conservative members of the US Senate and he showed his colors as he began making his closing statement as a commission member.  Maybe not since Ronald Reagan have there been more eloquent or powerful spoken words about what being a conservative should be all about.  He worried allowed that America had abandoned the concepts of the founding fathers.  We are, the Senator-physician diagnosed, a system “rotting from within.”  The United States, he charged, has abandoned self-reliance and limited government in favor of dependence.  We have voted ourselves “unaffordable programs.”   Again and again he suggested that we have lost our way.  Coburn is not a fan of the commission’s recommendations.  “I have heartaches with tons of it,” he said.  In another place he remarked, “I am not happy with 50%.”  Then he turned again to the qualities that made America great, including self-reliance, to which he added “sacrifice.”  America, he suggested, was built on sacrifice.  To work, and sacrifice for the next generation, and for that generation to live better, are at the heart of the American dream.  A man of Coburn’s deep conservative convictions could easily have voted against the commission’s recommendations.

But he didn’t.  He applied the lessons of the American experience – particularly the lesson of sacrifice – and sacrificed something himself.   He sacrificed some of his own conservative ideological convictions in an effort to make America better for the next generation.  Dr. Coburn obviously appreciates that while principles are important, ideology that never yields is irresponsible and unAmerican  (Be sure to watch Coburn’s full statement here ).

Where does America find more bright lights like Alice Rivlin and Tom Coburn?  They are not generally found in Washington, where single-minded partisanship, blind ideology and political careerism trump the good of the nation.  They are out here, among us.  They are our friends and neighbors.  We need to find ways to re-structure our system so that citizens with our normal and quintessentially American priorities will once again serve in government.

In fact there are many possible solutions involving spending cuts, tax increases, and various restructuring measures that can promote efficiency at the margins.  As one panelist said, “We can do it the conservative’s way, we can do it the liberal’s way, or something in between, but we must do it.”  Indeed.

Only one leading American politician today, Republican Congressman Paul Ryan from Wisconsin, has made the national debt his signature issue.  Ryan proposes to balance our books without tax increases.  Few people think this plan is realistic, politically or financially.  But at least Ryan cares and thinks deeply about the subject, which is more than can be said for any of the leading Democrats, who have not even bothered to pass a budget resolution for the fiscal year, let alone design a plan intended to address our long-term structural deficit.  If the Democrats want Americans to take them seriously on the terrible topic of deficits and debt, then they need to put something on the table.  And for that matter, it would be nice to know whether or not the rest of the GOP back Ryan’s plan and  share his sense of urgency.  Addressing entitlement spending is not a significant part of the Republican’s recent “Pledge.”

There were no radicals on today’s panel, unless one believes that compromise is itself a wild-eyed notion. Isabel Sawhill, of the Brookings Institutions and the most liberal member of the panel, lamented the election defeat of Mike Castle at the hands of Tea Party candidate Christine O’Donnell in the Delaware Republican Primary.  Sawhill had worked with Castle and knew him to be a man willing to compromise, probably unlike most members of the Tea Party.  The race to the extremes, Sawhill suggested, was bad for the business of balancing our books.  Maybe she has a point.  But seen from the perspective of an ordinary citizen deeply concerned about debts and deficits, the Tea Party is the only movement or party absolutely dedicated to cutting spending; it is their mission.  Democrats and Republicans alike haven’t given concerned Americans any reason to trust them with making the hard choices.

Even those who agree that tax increases must be part of the solution realize that the majority of the action must come on the spending side.  The United States cannot tax its way out of its fiscal hole because the costs to productivity would be too high and would discourage revenue flows into the Treasury.  Among the  budget wonks thinking about ways to address the growing debt, most advocate a range of 30%/70% to 25%/75% in the ratio of tax increases to spending cuts.

Whatever the economically and ideologically proper ratio may be, nothing can happen without political will.   David Walker understands this. He appreciates the role that the overwhelming desire for reelection plays in Congress’ inability to act to diffuse the fiscal time bomb.    To get our leaders to focus more on the future of their country rather than on their next reelection, Walker supports Congressional term limits and public campaign financing.   “We have something the founding fathers never expected,” explained Walker, ” — career politicians.”

One Congressman, Paul Ryan (R-WI), who is the ranking Republican member of the House Budget Committee, has offered a detailed plan designed to put the United States on a fiscally sustainable path.  In so doing, he has drawn a big fat political bull’s eye on his own back, daring the Democrats to attack his ideas, which they and their allies have done with glee.  But without a plan of their own, Democrats should keep their mouths shut.  For courage alone, Ryan and his ideas deserve respectful consideration.

Congressman Ryan, in his “Road Map for America,” proposes nothing less than a radical transformation for the delivery of most government services.  Under Ryan’s plan, Medicare, Medicaid, and Social Security would dramatically change as would the way many Americans buy health insurance.  Ryan would also fundamentally reform corporate taxation by replacing corporate income taxes with corporate consumption taxes.   Ryan invites his fellow citizens to dig as deep they want into the details at his website.  The scope of what Ryan proposes is vast, so here is only a taste of his ideas.

For Social Security reform, Ryan refloats the long-held Republican position that workers should be able to put away or invest a portion of their payroll taxes for their own retirement.  Democrats love to demagogue this idea by accusing their opponents of wanting to “privatize” Social Security, as if the Social Security safety net would necessarily disappear under such a proposal.  Among other safeguards, Ryan would have the federal government guarantee a return equal to the rate of inflation. Opponents would like to categorize such “privatization” as radical, but it’s not. Over thirty countries from around the world allow workers to invest at least a portion of money they would otherwise pay in payroll taxes in private but regulated retirement accounts .   In Ryan’s plan, future Social Security benefits are cut for workers who are 55 or younger in 2011, but beginning in 2012 they will be entitled to invest some of their payroll taxes, which would almost certainly guarantee them much more money at retirement than under the current system.

Democrats, bashing Ryan’s plan like a piñata, claim that he wants to “abolish” Medicare and Medicaid.  While technically somewhat true, Ryan does not propose to leave the old and impoverished without healthcare insurance, out to forage in hospital dumpsters for discarded medical supplies, or to shout medical questions at passing doctors.  Rather, Ryan proposes to move to a model similar to the one offered by Democrat Ron Wyden, author of an innovative universal healthcare proposal that President Obama pretended did not exist during the course of this past year’s healthcare debate.  Under Ryan’s plan, all Americans are encouraged to buy their own insurance, with generous tax credits and vouchers for those who cannot afford insurance on their own.  Medicaid patients might have high deductible  plans with their health savings accounts (HSAs) funded by the government. The long-term care portion of Medicaid would remain intact.  Instead of Medicare, an elderly person would get, on average, $11,000 per year to buy insurance, a sum indexed annually to an inflation rate the falls between the overall rate of inflation and the current rate in healthcare cost increase. It is fair to question whether Ryan is offering  a big enough subsidy, or if his revenue assumption are too generous to balance the budget.   These are reasonable questions that Ryan would probably be happy to debate, but more often his ideas are pummeled by politically motivated cheap shots.  Those who attack Ryan should answer some questions of their own:

1)      How are we going to get our spending and debt under control?

2)      What are the most efficient means to provide the services we all want and need?

In the areas of medical-services delivery and social security, Ryan proposes consumer-centered  and market-driven models, as opposed to the big-government model we currently rely on but is going broke.  In everything we buy as consumers – from vegetables, to home electronics, to auto insurance – we rely on a market to deliver the best combination of quality and price.  Does medical insurance really have to be that different?  And no  individuals in their right minds would prefer to give money to the government to spend immediately, with only an IOU in return, rather than invest their own money, for their own retirement, securely stowed in their own account.

Both political parties need intellectually weighty, honest and articulate leadership to inspire the nation to address the immense and complex challenges of deficits and debt that truly threaten the America we know and love .  Conservative leaders, rising out of a populist tradition, have been insufficiently brainy and articulate.  Paul Ryan, should he assume leadership of the Republican Party, would completely reverse this trend.  President Obama, while possessing some impressive intellectual credentials, has been disappointingly dishonest on many issues, most notably those involving the true cost of his healthcare plan.

If Paul Ryan were to lead the Republicans in 2012, he would force a substantial debate about the issues that really matter – the nation’s debt and deficit, and the related public services on which we depend.  Ryan’s quick-mindedness would make Democratic dissembling more difficult and might bring out some of the nobleness of character that so many Americans thought they saw in candidate Barack Obama.

Ryan sits on the President’s deficit commission, which is all well and fine; we hope they can find a bipartisan solution behind their closed doors.  But Democrats should man-up (or woman-up in the case of Speaker Pellosi), by standing and delivering their own deficit and debt reduction program.  They should engage the passionate young conservative reformer, Congressman Paul Ryan.   It is time for bright and honest people to make the hard choices.

It is certainly a strange time not to have a federal budget.  Budget resolutions are non-binding, but like a family budget, they do provide a framework for controlling spending.  The federal debt is scheduled to rise to over 90% of GNP in five to ten years, leading to a Greece-style economic collapse. But unlike Greece, there is no one out there to bail us out.  A fiscal 911 is on its way, except it won’t be a surprise. When will we act to stop it?

Before the Democrats took office  the national debt was $56,000 per household.  Now it’s $72,000 per household.  These figures do not count the $379,000 per household in unfunded liabilities for Social Security and Medicare.

Some have said for a long time that we need a lockbox for Social Security and Medicare.  But through their inactions our politicians have always responded, “We don’t need no stinking lockbox!”  They have spent all of those payroll taxes, including those paid by some of America’s lowest-wage workers. Nothing is there but an IOU.  Demographics have turned a reasonable program into a pyramid scheme worthy of Bernie Madoff while Congress, term after term, has buried its head in the sand.  Re-elections are, after all, more fun than hard choices.

And now, in times of increasingly harder choices and oncoming fiscal calamity, Congress is not even planning to restrain spending through the use of a tool as routine as a budget.

Forget terrorism, global warming or any social problem that might come to mind.  In the United States and in Europe, debt is the crisis of our time, and our “leaders” – President Obama, House Speaker Pelosi, and Senate Majority Leader Reid – are willfully looking the other way.  Moreover, they have made the situation much worse through the creation a new entitlement – an attempt at universal healthcare insurance – without first reforming the old entitlements.  Indeed, like the bandits in The Treasure of the Sierra Madre,  they robbed to get what they  wanted: they stole from Medicare, a program already going broke.

The Democrats poured in $125.9 billion so far to bail out Fannie Mae and Freddie Mac (institutions Democrats refused to reform years ago), with no effort to change the programs partially responsible for the financial collapse.  Fannie and Freddie need no stinking badges either, just taxpayer cash.  Now they want $19 billion more to save private profit at public expense.  At least bailed-out corporations in wholly private industry, from Goldman Sachs to GM, are paying back owed taxpayer money.  If you want to know why Fannie and Freddie are not being reformed, just look at who they are paying off with campaign donations.

Certainly not all of this debt is the Democrats’ fault.  Congressional Republican majorities have not lifted a finger to reform entitlements either.  President George W. Bush added a Medicare drug benefit without paying for it, and launched the war in Iraq, which was wrong for a lot reasons, including its massive expense.  But Bush, to his credit, tried to reform Social Security.   Congress said no.

Unless something changes, Obama, Pelosi and Reid will be remembered as the Neville Chamberlains of the Great American Fiscal Collapse. Politicians don’t seem to appreciate the extent to which the American people demand action on spending and the debt.

Concern – or fury – over federal spending and the growth of the national debt is at the heart of the Tea Party movement.   The Left likes to pretend that the Tea Party consists of racists and other nitwits without any legitimate arguments to make about the direction of the country, but demonizing the Tea Party won’t work.  Most Centrists and Independents, and even many Democrats, though they do not watch Glenn Beck or believe that Sarah Palin is presidential timber, share Tea Party concerns about out-of-control federal spending.  They will vote to purge any politician, Democrat or Republican, who appears to put a political career above the fiscal stability of the country.  Tuesday’s results and recent elections in Virginia, New Jersey and Massachusetts offer ample evidence of this.

Congressional leaders obviously lack the courage to pass a budget.  They don’t want to showcase their fiscal irresponsibility, call for higher taxes or cut spending, so they refrain from passing a budget and hope no one notices.   But citizens are paying attention.  Here’s betting that the American people won’t sit by and watch the United States destroyed from within by irresponsible politicians who care more about their ideologies and political careers than they do about the long-term good of the country.   Politicians who don’t bother to write a budget to live by in these fiscally perilous times betray the public trust and are unworthy of the offices they hold.

President Obama is expected to announce today a $3.8 trillion budget with a $1.2 trillion deficit for FY2011.  Here’s the context within which he will reveal his plan.  For decades now, the federal debt acquired through years and years of deficit spending has been the “elephant in the room” – the huge presence nobody talks about but everyone knows is there.  In last week’s State of the Union address, however, debt joined unemployment as the two most urgent issues facing America as Obama enters his second year as our President.

Last year, the White House and Congress went “Keynesian” in a big way as the real-estate bubble popped and started to pull Wall Street and Main Street down with it.  In crisis mode, they quickly passed stimulus bills designed to unfreeze credit and prevent the rate of unemployment from reaching double-digit percentages through a combination of renewed lending and “shovel ready” government spending to increase overall demand.

Last fiscal year, our federal deficit reached a record $1.4 trillion, and it’s projected to total $1.7 trillion this fiscal year, the first quarter of which has already seen spending exceed revenue by $389 billion, a 17% increase over the same period a year before. But as we enter February, unemployment resists declining below 10%, and debt as normally configured has reached almost $12,300,000,000  – or roughly $40,000 for every man, woman and child in America.

On January 12, the Obama Administration announced that its Council of Economic Advisers determined that the $787 billion stimulus program “saved” or “created” between 1.5 and 2 million jobs during 2009. Using the upper bound, that’s $393,500 per job. The “what if” ‘s of history cannot be proved, they can only be stated.  But even if we accept the upper bound as a true of the extra unemployment we’d have suffered if the Administration’s policies had not been implemented, it’s hard to conclude that our money has been well spent.  At best, each job has cost us $393,500, while none is regarded as permanent and the average compensation for comparable work is surely less than $75,000 on an annual basis.

<em>Pace</em> John Maynard Keynes and his new followers, it looks as if new government spending programs and the concomitant deficits are hurting, not helping recovery. Consumers, savers, and businesspeople alike worry about which taxes are going to increase and by how much to avoid continued debt explosion.  We also worry about what’s going to happen to interest rates and their effect on private borrowing expenses and the carrying costs of the national debt.

How, then, should we analyze the debt and its effect on the economy?

First of all, it’s ridiculous and misleading to compare today’s $12 trillion with, say,1950’s  $357 billion because of the cumulative effect of inflation over the last 60 years.   And we should also correct for growth in the economy.  After all, whether a $200,000 private mortgage is extravagant and foolhardy or modest and frugal depends upon the income of the borrower.  The following graph basically makes both of these corrections.

As is the case with most statistics, the tone of the story depends on its starting point.  Begin in 1945 if you want to relax, in 1980 if you’re okay with having your blood pressure soar.

Either way, two other adjustments are also appropriate. We should rework the numbers for automatic stabilizers, and we should separate government spending into consumption and investment categories, just as we do for private spending.

The Beltway doesn’t have to change anything to get some Keynesian stimulus spending going.  As unemployment increases, welfare payments will rise and tax revenues will fall, increasing or creating deficits.  If there’s any validity to Keynesian Economics, these quick developments are appropriate, and fair assessment of deficits should reconfigure the sums with these formulaic changes in mind.  We should find out, in other words, what the difference between spending and taxing would be at a level of employment considered “full”.

Our evaluation of debt should also depend in part on whether it’s being acquired through consumption or investment spending. We should be less concerned about deficit spending that finances investments than we are about deficits fueled by transfer payments properly categorized as consumption. Just as the probity of taking on a $200,000 mortgage depends on income (and its security), so is it sometimes okay and even good to take on some debt when acquiring an asset like a home, but not so good to finance a shopping bender in the Mall of America or a new car (which loses half its value right off the lot).

Unfortunately,“investment” is a malleable term that politicians will use to their advantage and not to ours.  Is the War in Iraq an investment in our future (which includes national security, itself dependent on reliable supplies of oil)?  Is Obama’s likely proposal of a huge increase in spending on education an investment in our youth, the individuals whose payroll taxes will be funding our Social Security checks?  Or, absent reform, is it more like income redistribution and consumption?

The issue of Social Security demands more scrutiny.  It also requires grit.  While insight is gained, the comfort our graph of debt/GDP can provide if we start with the Truman years is trashed.  The US could reduce national debt as a fraction of national income after World War II fairly easily because budgets weren’t encumbered by entitlement programs as they are today.  The value of these programs is not in question.  The problem is their cost, both in dollars and in flexibility and control. Baby-boomer demographics were not in play during the  1940s.

The unfounded future liabilities in entitlement programs like Social Security and Medicare dwarf all other deficit and debt concerns.  Neither has a nest egg adequate to the soaring payouts the formulas predict as baby boomers become eligible for benefits and are expected to live longer than their parents and be supported by taxes on a smaller work force. Last year alone, the combined debt of these two programs rose $5 trillion
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The fiscal health of our federal government is also worse than today’s debt figures would indicate because they fail to include off-budget items like subsidizing Fanny May and Freddie Mac.  Last week, the Congressional Budget Office reduced its guesstimate of another decade of their financial support by a whopping $20 billion. Yea!  But that leaves $79 billion still expected to be expended and begs the question of why these important players in the real-estate bubble remain “outsiders” even though any pretense that they’re run for a profit should long have been abandoned.  Time will tell, but the move to increase their loss limits does not auger well for us taxpayers.  It’s a cheap trick for the government to take quick credit for the positive effects of subsidizing mortgages through Fan and Fred, their cousin Ginnie Mae and uncle FHA, while failing to account for all the default risks accumulating as loss ceilings rise.

And then there are all the times the federal government improves its budget by fobbing off responsibility for funding certain programs to the states.  Medicare mandates are one example of this cost shifting.  In assessing government debt issues, we should be looking at all three levels of government – national, state and local, with an eye not only to their totals but to whose debt is really whose.  Should federal mandates really be paid by the states?  For what government spending should the counties, cities and towns be responsible?

Another matter involves the cost of servicing all this debt.  Like entitlement programs, interest payments are a huge part of overall government spending – indeed, its fourth largest category.

To whom are all these interest payments made? In times past, almost all debt holders were Americans, so we could call these payments mere “transfers” among our citizens.  Increasingly, however, our debt goes overseas, where China, Japan and the UK are currently our largest debtors.  Their holding our debt helps finance our trade imbalances and keeps our interest rates lower than they might otherwise be, but it also makes us vulnerable to outside change and exchange-rate issues.

It’s a good thing that we are now talking about the Elephant of Debt in the room.  The focus for reform, however, should not be debt but rather the growth in government spending, expected to reach 35% of GDP this year.  That’s the real, and even larger elephant whose presence we’ve been ignoring.

In the case of pulling an economy out of recession, it can be argued, although not with complete confidence these days, that additional government spending can actually increase private production.   In the case of full employment, however, all government spending takes the place of private spending.  If it’s funded by debt, interest rates may rise and “crowd out” private investment.  If it’s funded by taxes, the consequent declines in consumer demand and company profits will also cause private investment to decrease.

The key issue then becomes whether diverting resources to government use improves the public weal or not.  The consequences of whether the spending is financed by today’s taxes or by tomorrow’s taxes, for all their importance, remain secondary.  An important difference would involve whether voters respond more strongly to tax or debt increases and through their response can impose adequate spending restraint on politicians approving the programs.

How do we change the current trajectory of the ratio of government spending to GDP?  Given all the worthy entitlements and the difficulty of defining and controlling “waste”, the most attractive option is to grow the economy.  Investment in equipment, technology and people is key.  The question, then, is whether and to what degree the government, rather than the  private sector, should undertake these investments.  We already know that predictability in tax and regulatory legislation is a necessary first step.