President Obama made one of the most important speeches of his presidency on Wednesday. It was an eloquent defense of his basic approach to government and outlined specifically how he would tackle the nation’s long-term debt problems. For people who have been searching for Barack Obama’s core beliefs, this speech is perhaps the single best place to start — though it fell short in one important aspect.
Obama revealed himself to be a left-of-center Democrat, but not very far left. To begin with, he accepts the proposition that the deficit is America’s biggest challenge; proposed a set of measures that would reduce the deficit, with large spending cuts in all programs and — crucially — proposed a fail-safe so that if the deficit targets are not met, Congress would immediately cut spending further or raise more taxes.
This last feature may be the most important specific proposal in Obama’s plan, and a sign of its credibility, because it addresses the glaring flaw in almost every budget proposal: magical assumptions about economic growth, tax revenue, efficiencies and cost reductions. On paper, of course, these assumptions show the deficit falling drastically. A fail-safe ensures that if the assumptions don’t work out — which is highly likely — and the deficit expands, Congress is forced to act.
Obama presented a vision of an activist government that will make crucial investments in education, infrastructure and research. These investments have been as much a part of American history, he noted, as a vibrant market economy. Without such government support, there would be no American semiconductor industry, no early adoption of computers, no Internet, no global-positioning system.
Obama also pointed out that other countries are investing heavily in these areas. Since 1998, for example, China has tripled the percentage of its gross domestic product devoted to education. The number of college students quintupled, from 1 million in 1997 to 5.5 million in 2007. Public funding for universities is collapsing in America while growing massively in China. In this increasingly competitive landscape, should we further cut education?
On taxes, the president’s position is correct and inevitable. For a generation, we have kept taxes low as spending crept ever higher, and we made up the difference by borrowing. Rep. Paul Ryan’s budget plan is honest in showing that if these low rates are maintained and, indeed, reduced further, domestic discretionary spending would have to decline to levels not seen since the 1920s. As the Financial Times’ Martin Wolf points out, it would mean the virtual elimination of the Defense Department. America’s tax burden will have to rise; the real debate is simply in what manner. Tax reform — closing loopholes and deductions — is clearly the best approach.
Then there are the entitlement programs. Here, Obama was at his most eloquent but least pragmatic. He made a passionate case for maintaining a basic social safety net for all, particularly the elderly and the poor, that I think will resonate with most Americans. But he lost his courage in proposing sensible reforms to these programs. The number of people eligible for Social Security and Medicare will double by 2030. At that point, those two programs plus Medicaid will take up about 60 percent of the federal budget. We need radical thinking to make them affordable, if only to be able to spend on all the investments that Obama believes in.
The president argues that his approach to cost-cutting in health care is better than Ryan’s approach, which shifts costs onto individuals — and assumes that individual choice will magically get costs to plummet. Probably true, but the nation will probably also need to try every approach — using Medicare’s buying power to force costs down, shifting from a fee-for-service to a fee-for-outcomes approach, and having consumers pay more — to truly drive down costs. For Social Security, we should also raise the retirement age, means-test benefits and change the indexing formula. As a society, we must determine roughly what percentage of the federal budget will pay for entitlement programs rather than simply allowing demographics and escalating costs to drive these costs ever higher.
I praised Paul Ryan for his courage in presenting a budget that takes risks and proposes painful cuts. It has also had the effect of spurring Barack Obama to present his own serious proposal. I prefer Obama’s approach — which is also closer to that of the Simpson-Bowles commission — with more cuts to entitlements. But what’s critical is that, finally, after years of kicking the can down the road, we are having the national debate about America’s future.