Out on A Limb

Fixing the budget is not an issue that either party is engaging now. The Democrats want to avoid offending their constituencies and so have mostly sidestepped initiatives on trimming big entitlement programs. The Republicans have chosen to stand by low taxes and big security spending, and even introduced a new Medicare prescription drug benefit. This combination falls short of a cohesive package that would ensure a limited but balanced government in the future.

Fifteen years ago, the federal government faced up to its fiscal duress and Congress and the first Bush administration reached a giant compromise on spending and taxes. Many people suggest running the 1990 playbook again. It won't work. The current predicament is different from the 1990s.

In 1990, the baby boomers were 15 years further away from retirement; even gradualist, slow-acting medicine in old-age programs had time to work. In 1990 it was possible to imagine a peace dividend from the end of the Cold War that permitted annual defense spending to decline by nearly $50 billion.

Today's world looks too dangerous for that. In 1990 attempts to control big government or improve federal efficiency could focus on domestic discretionary spending. Now, shaping up this relatively small slice of government spending would not yield enough dividends for other programs.

And, in 1990, there was concern that the U.S. economy had lost its ability for sustained growth. Ironically, the economy's very success in recent years may be a source of complacency against changing course. Yet the greatest threat to our economic future is the mandatory old-age spending that economic growth cannot plausibly overtake.

It is safe to say that things will change, because they must. I'd rather not raise taxes, but unless government remains at its traditional size, I don't see any way around it. On the other hand, just getting rid of the 2001 tax cuts won't solve the problem either; they're just not big enough.

A good leading indicator of real fiscal change -- serious change -- is whether lawmakers begin to tackle the old-age programs. Frivolous budget strategies will focus on discretionary spending, or pretend that there is the will, or even a way, to raise taxes fast enough to cover the expanding cost of old-age spending.

A serious approach should embrace strategies for growth that ensure that the economic pie is as large as possible. It should rethink the package of support for old-age medical care, long-term care services and retirement income. And it should balance the other demands on the Treasury against the virtues of low, efficient taxes. But most of all, a serious approach should make sure that the budget adds up.

Author's e-mail:

dhe@cfr.org

Douglas Holtz-Eakin was director of the Congressional Budget Office from 2003 to 2005 and chief economist for the Council of Economic Advisers from 2001 to 2003. He is now a senior fellow at the Washington office of the Council on Foreign Relations.