Face Social Security
The main achievements of the lame-duck session of Congress were reminders of what might have been. President Obama gave something to get something. To secure a second stimulus, he accepted Republican economic methods. To pass the New START treaty, Obama offered assurances to Republican senators on nuclear modernization and missile defense. Contrast this with health-care reform, imposed in party-line maneuvers that left an aftertaste of ideological radicalism.
The American political system, it turns out, was not broken - just poorly used for nearly two years.
But the session was also a preview of conflicts to come. The defeat of the omnibus spending bill - a trillion-dollar, earmark-laden declaration of congressional imperviousness to public sentiment - was exactly the sort of fight Republicans are spoiling to repeat.
Which leaves a vacationing President Obama with his largest strategic decision since choosing to pursue health reform at all costs. In his State of the Union address, he will take a first cut at the economic message he carries to reelection or defeat.
Some of that message is predictable. Obama is likely to propose a multiyear cap or freeze on discretionary spending. But there is no way he can outbid Republicans when it comes to cuts. The president is also likely to endorse budgetary reforms such as an earmark ban.
All of this would be useful; none of it decisive. Only two proposals under discussion would reshape the American economic debate as well as the president's public image: reform of the tax code or reform of entitlements. Both are necessary, difficult and politically deceptive.
Overhauling the tax system seems the easier approach. It isn't. Most serious plans, including the options raised by the president's debt commission, would broaden the tax base, consolidate and lower rates, and eliminate most tax deductions and exemptions. But even a revenue-neutral tax overhaul would create a complicated system of winners and losers. Especially if the mortgage interest deduction, the charitable deduction and the child tax credit were modified or eliminated, the losers would know immediately who they are. The winners must be persuaded of abstract, future benefits.
Republicans would have an easy time criticizing a thinly disguised tax increase for millions of Americans. It would seem like another Obama overreach that fundamentally changes the economy in frightening ways - confirming an image that the president desperately needs to change.
The other option, entitlement reform, seems more politically dangerous. It is actually more promising.
Medicare is the main policy challenge here, because rising health costs are the primary cause of unsustainable entitlement commitments. But Medicare reform - the topic of intense, ideological debate - is a political nonstarter. While Social Security is a relatively small contributor to future deficits, reforming it would be a large symbol and a logical place to begin.
A member of the House Republican leadership recently told me that bipartisan Social Security reform could be written "on the back of a napkin" - which is essentially what Obama's debt commission did. It set out a plan that would cut benefits for high-income earners, make the payroll tax more progressive and gradually raise the retirement age (with a hardship exception for those engaged in manual labor).
Obama's liberal base contends that the Social Security trust fund is not in immediate trouble. But this argument depends on an elaborate accounting trick. The trust fund is not filled with assets - gold bullion and Apple stock. It is filled with debt issued by the government to itself. The surpluses of the trust fund are in fact liabilities for the government as a whole. And these illusory surpluses are regularly used to subsidize the rest of the budget. The scheme begins to collapse in 2037, when promised benefits for Social Security recipients will suddenly drop by about 25 percent - unless the system is reformed.
Liberals have threatened a serious political revolt if Obama pursues Social Security reform, and that's a genuine risk. But Obama's urgent political need is to polish his image among iIndependents on spending and debt. And this won't happen by being risk averse.
Social Security restructuring is not the obvious choice for Obama, but it is the smart one. It is achievable. It would invest Republican leaders in a constructive national enterprise. It would reassure global credit markets that America remains capable of governing itself. It would result in a more progressive, sustainable system. And it would make a dramatic, timely political statement: that the president is capable not only of expanding government but of reforming it.