Obama must slay the job-killing beast
President Obama could have focused on solving the financial crisis. He did not. He could have endeavored to conquer the looming threats to our future. Instead, he added to them. Now that voters have rejected his first two years in office, the president should not waste this political crisis: He should seize his "Nixon to China" opportunity.
Government is a greater threat to America in 2010 than China was in 1972. Government is smothering the pioneering, entrepreneurial spirit that propelled our economy past those of older, larger nations. Ever higher taxes on small and big business, layers of red tape, onerous labor regulations, and punitive bureaucrats and lawsuits are suffocating U.S. economic vitality. So far, the president and his fellow travelers in Congress have made things worse: If Obama is serious about changing the way things are done in Washington, he must slay the job-killing beast Washington has become.
He must also choke off government's voracious appetite. Under current law, the federal government's share of the economy will grow from its 50-year average of 20.3 percent to 26.5 percent by the end of this decade; federal, state and local governments will then constitute more than 40 percent of the economy. At what point do we effectively become a socialist economy, with its associated low growth, low incomes and permanently high unemployment?
And at what point will lenders to our government insist on charging punishingly high interest rates, or stop buying U.S. debt altogether? Congressional Budget Office data indicate that government spending through the next decade will require $12.4 trillion in additional debt, bringing our total public indebtedness to $22.2 trillion by 2020 - about the size of our gross domestic product. America's debt then will look a good deal like Greece's debt does today.
Obama's first instinct is to blame all this on his predecessor's tax policies. But the $22.2 trillion figure already assumes that Obama will raise taxes on annual incomes higher than $250,000, repealing the so-called Bush tax cuts for the rich. So the $12.4 trillion in new debt is entirely due to government spending and the president's own tax policies. Spending, Mr. President, is what threatens America's economy, not tax cuts.
To tame runaway government spending, the president should of course embrace the usual measures: freeze government employment; freeze growth in discretionary spending; veto every spending bill chocked with earmarks; work to regain an effective line-item veto; extinguish ineffective, wasteful programs. But these are just the start.
If the president is to become serious about spending, borrowing and deficits, he must subject government to the two budgeting rules employed by every well-run business and home.
Rule One: Start with the total, don't end up with it. Decide from the outset the amount that the government will spend for the year. Don't add up all the program requirements, departmental requests and political wish lists to calculate the total - that's surrendering, not budgeting. The nation's 50-year average annual tax burden has been 18 percent of GDP. That's the right figure for total spending; it may take several years to rein in spending to that level, but it should be the target.
Rule Two: Go where the money is. With entitlement spending about half of all federal spending, the president has no choice but to address Social Security, Medicare and Medicaid. He should propose less costly progressive indexing for future Social Security beneficiaries - using the consumer price index inflator rather than the wage index for higher-income retirees. Medicaid should be granted in block to the states, giving them flexibility to meet the needs of poor residents in their own ways. Medicare will require reform of health care, making it more like a consumer market and less like a regulated utility. Medicare recipients should also be given better options for private coverage. Regardless of the reforms chosen, the entitlements budget should be subject to Rule One - set a total first and conform the programs to that level. Advocates of this course include the Brookings Institution on the left and the Heritage Foundation on the right.
Finally, don't let the Bush tax cuts expire. Keeping them will yield revenue at 18.4 percent of GDP in 2020 - higher than the historic tax average. Lower taxes will propel growth, add jobs and produce a larger GDP that can accommodate our spending priorities. And don't push defense below 4 percent of GDP; with today's global threats and allies' diminishing military capabilities, freedom will increasingly depend on American strength.
The president can turn his party's losses Tuesday into a win for the country. It all depends on the course he sets.
The writer, a Republican, was governor of Massachusetts from 2003 to 2007.