Making future cliffs count
The Washington Post, January 3, 2013
You can bemoan the endless cliffs, and I've done that.
You can scratch your head at Democrats who claim "victory" with a tax deal that's way to the right of Simpson-Bowles—locking in virtually all of the Bush tax cuts and shrinking federal revenue by 2 percent of GDP just as the boomers retire.
You can marvel at a Republican House majority so blind to math and demography that it regards any marginal rate hike as unacceptable, no matter how small a sliver of high earners it affects.
And you can lament the fact that Americans under 40 haven't woken up to how they've been sold out (again) by these arrangements.
But we are where we are. So the only practical question now is, how do we make the next cliffs count? My answer is what I'll call "cap and swap."
Remember what we're trying to accomplish. It's not just about "saving the safety net," as the left claims, or salvaging "freedom," as the right argues. It's not even, ultimately, about solvency; that's the ante. Our goal should be a fiscal framework that bolsters U.S. competitiveness through investments in infrastructure and R&D, renews upward mobility through major investments in early childhood and promotes the innovation and growth that (in the end) makes redistribution in the name of equal opportunity and economic security possible. Oh, and the deal should tame our debt and deficits, too.
Given these goals and the coming cliffs, what should Washington do now?
On spending, the truth is that GOP favorites like raising the Medicare eligibility age or adopting a "chained CPI" for Social Security shave only pennies off the future costs of these programs. Even Paul Ryan's "tough" budget didn't touch Medicare for a decade, and left Social Security off the table entirely. Beyond this, Republicans haven't identified anything remotely equal to the savings we need. And because many liberals haven't thought through the long-term budget implications, or wrongly assume that taxes can rise indefinitely or that the Pentagon can be shrunk to something less than a triangle, they resist sensible steps to slow the growth of Social Security and Medicare, not realizing that this course will assure before long that there isn't any new money to spend on (say) poor children.
I say, if the president and Republicans want to restrain entitlement growth, but neither wants to offer specifics, let them come together around a new aggregate annual cap on entitlement spending. If Social Security, Medicare and Medicaid are together slated to grow by 6.7 percent a year for the next decade, enact a law saying they can only grow by, say, 5 percent (saving $400 billion in year ten). The details can be worked out later. A sequester that kicks in if the target is exceeded (and which can be waived only by a two thirds vote) lets the Congressional Budget Office score the savings. Add a new "65/65" rule that if programs serving people over 65 comprise more than 65 percent of non-defense, non-interest spending (my rough estimate pegs them at around 55 percent today), a further consequence is triggered (if I were king, when this threshold was breached, the votes of Americans aged 18 to 40 would be counted twice for a decade).
I know what you're thinking: An entitlement cap is a charade without policies designed to stay within it. But it's the most constructive charade we could get this year. Caps on discretionary spending have worked pretty well. And an entitlement cap embraced by both sides could put fresh energy into bipartisan efforts to make the health-care system more efficient.
That's the "cap." On taxes, we need the "swap." President Obama must insist on real revenue in the next cliff endgame—you can't retire the boomers and renew America with taxes never topping 19 percent of GDP. But with marginal rates now headed to the mid-50s in high tax states like California and New York, Obama is about to lose his support among the politically vocal lower-upper class. In the end, his drive to tax the top even further via new limits on deductions won't get him nearly the revenue the country needs.
That means the jig is up: The welfare state in an aging United States requires higher taxes on the middle class, phased in once jobs and growth pick back up.
But the new taxes shouldn't be income taxes. Now is the time to introduce a small carbon, VAT or financial transactions tax—or, preferably, all three. Small rates can rise over time. Use these new taxes in part to buy down (and eventually eliminate) corporate income and payroll taxes. (For every two dollars in new taxes from these sources, for example, one dollar in corporate income and payroll taxes could be cut).
If this package seems to tilt right, Obama could toss a much-needed minimum wage increase into the mix, and even a new marginal rate of 50 percent for earnings above, say, $5 million a year—with the proceeds dedicated to a trust fund to bring great teachers to poor schools.
Think of these as the potential contours of a Really Grand Bargain. The numbers need to be run. The "win" for both sides needs to be detailed (a task beyond one column). But you see the political and policy molecule I'm trying to construct.
If we want to turn our endless cliffs into a big bang for economic growth and social justice, "cap and swap" may be the ticket. I'm not saying its what a benevolent dictator (or a gutsy presidential candidate) would do. But given today's screwball politics, and the chance that the debt limit could make folks aim high in one last ecstatic fever of constructive dysfunction, it's worth a try. Somewhere in the capitol, a "gang of six" willing to think imaginatively could get this conversation, or something like it, started tomorrow.