By Steven Pearlstein
Wednesday, February 6, 2008; D01

I know what you're thinking: "Please, not another federal budget story."

Who could blame you? It has become such a con game. The president sends Congress a budget that is immediately declared dead-on-arrival because of its rosy political and economic assumptions.

Democrats blame it all on tax cuts, Republicans on the fact that tax cuts are not permanent, and for 11 months they bicker until they finally rush through a continuing resolution that keeps everything the same as it was last year, except for lots of new money for Iraq, Afghanistan, homeland security and major weapons systems and the occasional bridge to nowhere.

No wonder, you've stopped paying attention. Why wouldn't you if you can't question spending on defense and homeland security, you can't touch entitlements, you can't even think of raising a tax, and all that's left is arguing over the crumbs left for education, housing, the environment and all the other things people really care about. And even with that, government will be running deficits in excess of $400 billion for as far as the eye can see.

But, fellow Americans, I have good news. It's not hopeless. Bear with me and I'll show you how it's possible to maintain spending on valued domestic programs, preserve Social Security and Medicare, the Bush tax cuts and whittle the federal operating deficit to more reasonable levels. All it takes is a modest amount of shared sacrifice and a willingness to ignore the scare tactics of special-interest groups.

Let's begin on the spending side, using round annual numbers:

After 9/11, it was natural that we'd respond by throwing money at every threat that ever crossed the mind of a federal security official or consultant. But now that we've had a chance to try a few things and reassess the risks, does anyone really think that we can't shave $5 billion from a $60 billion homeland security budget that is out of control?

We all love manned space flight, but at this point, we're not learning much from it. There's another $5 billion.

Agricultural subsidies distort the global economy, enrich wealthy farmers and drive up the cost of food and land. Replace them with a comprehensive, well-run federal crop insurance program and you can protect more farmers from the vagaries of weather while saving taxpayers a cool $5 billion a year.

The Pentagon is our next stop, where the generals and the defense contractors have used the war on terror to justify an orgy of spending on weapons systems that have little or nothing to do with that war. My cancellation list includes the Joint Strike Fighter jet that is having as much trouble finding an credible enemy as a creditable budget estimate; a Star Wars missile defense system that will never work; the gold-plated DD(X) destroyer; and the Army's overly-designed Future Combat Systems. And while we're at it, let's admit we have enough of the very cool F-22 stealth fighters and very dicey V-22 tilt-rotor helicopters.

On the operational side, the Pentagon could easily save $2 billion a year by requiring military families and retirees to make modest co-payments on their health insurance and Medigap policies. And given that our current enemies don't do dogfights, we could probably cut a couple of fighter wings from the Air Force without much risk. The difficulty in recruiting new soldiers and Marines without lowering standards is probably also a good indication that we shouldn't try to increase troop strength once the Iraq war winds down.

In all, the Pentagon savings is about $20 billion a year in current dollars, in addition to the $120 billion savings once the troops return from Iraq.

Hundreds of federal programs, either harmless or marginally beneficial, are hardly essential for a government now bleeding red ink. In this year's budget, President Bush identified 100 such programs whose elimination would save $7 billion a year. Is there an American alive who doubts there are 200 more that would bring that total to $20 billion?

Add it all up, and I figure it comes to a reduction in discretionary spending of $175 billion a year.

Now let's move on to raising an additional $150 billion a year, not by raising tax rates but simply by closing loopholes that are either tilted toward the rich or are nothing more than corporate welfare.

All of these ideas come from the congressional tax committees or the semiannual "budget options" book published by the Congressional Budget Office. They include: stricter loan limits on the home mortgage deduction; limits on the deductibility of employer-paid health insurance, group life insurance, parking and transit fees; taxing income that builds up inside life insurance and annuities; elimination of the last-in, first-out inventory accounting method; elimination of tax breaks for oil and gas exploration and development; elimination of tax breaks for domestic manufacturing; closing loopholes used by corporations and individuals to shield overseas income from taxes; taxing carried interest of investment fund managers as ordinary income; and, in addition to a greatly reduced inheritance tax, taxing estates for unrealized capital gains.

Finally, entitlements and Social Security, where we have proposals from many blue-ribbon panels. My favorites: raise the payroll tax limit to $250,000, raise the retirement age one month every two years and use a more progressive formula for indexing cost of living. And, voila, we can save a beloved program without cutting benefit levels for the poor and middle class. Now that wasn't so bad, was it?

Medicare and Medicaid present the most difficult budget challenge, both because of size and complexity. What we can say about these programs, like the rest of the U.S. health care system, is that we spend way more than other industrialized countries to get health outcomes that, by most measures, aren't as good. So why not agree to limit the percentage of growth in spending for these programs each year to the growth in national income -- and leave it to a panel of independent health experts to make the best use of that fixed -- but still generous -- budget.

As it happens, there is such an panel, MedPac, which has made just such proposals, running the gamut from reducing payments to providers to reducing unnecessary treatments to increasing premiums and co-payments. Relying on MedPac would free these programs from the political influence of the special interests -- providers, drugmakers, insurers, advocates for the poor and the elderly -- who have fought off all attempts to rein in runaway entitlement spending.

I can't say whether this modest proposal would solve the federal budget crisis once and for all. What I can say is that they'd get us a heck of lot closer than where we are now -- which, as far as I can tell, is nowhere.

Steven Pearlstein will host a Web discussion today at 11 a.m. athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.