The Obama Plan

I watched most of President Obama's speech on deficit reduction today and later read the text of it. I have no problems with any of it, including the political positioning, which is clearly front and center, and I disagree with those who want or expect more specifics at this point.

Obama seeks to reduce the deficit by $4 trillion over the next 12 years as compared to current projections--these projections include considerable improvement in the economy, which, if true, will reduce the cumulative deficit, through reductions in social-net expenditures and improvements in tax receipts from individuals and businesses, just as much as all of this effort. That is one area--the need to continue the recovery--is one that Obama perhaps should have stressed more. His proposal is one that has $2 trillion of spending cuts (roughly 40% from areas agreed in the recent battles, 40% from defense, and 20% from Medicare/Medicaid), $1 trillion of revenue enhancement, and $1 trillion in reductions in interest on the debt (which result from the other reductions).

Of course his proposal is not the final form of what will happen. Congressman Ryan's proposal is just as far away, and the proposals of the Bowles-Simpson Commission are also far from being approvable by Congress in their current forms. What they all have in common, though, provides the basis of something important that can be done--now--to prevent a near-miss, slow-motion, high-kinetic-energy train encounter such as the one we had last week.

There can be agreement on a trajectory of deficit reduction--through a combination of recovery benchmarks, revenue increases, and spending reductions--over time, and on some agreed mid-course corrections if the rate of improvement in the budget deficit misses targets beyond certain margins of error. For example, if the economy improves on schedule but revenues do not, there should be automatic increases in tax rates or reductions in tax deductions; if the unemployment rate remains higher-than-projected, spending reductions--and the departments which would suffer them--should be specified; if interest rates rise, either these would be reflected in faster growth or both spending and revenue adjustments would be required to stay on track. Finally, these targets need to have teeth, such that a veto-level supermajority of both houses would be required to change them. This would allow for something like a declared major war which would have to change the picture dramatically.

Agreeing on these measures would not be easy, and that agreement would leave huge issues unsettled and fair game for the 2012 election, like what to do with health care entitlements, the level of defense spending, the type of "tax expenditure reforms" (changes in loopholes and deductions), corporate taxes, and marginal rates for the wealthy. But agreement on the trajectory--something that's comparable in all three framework proposals--would provide a basis to simplify annual budget battles (like the one expected for the 2012 budget), provide the needed reassurance to world markets, and give the public the impression that the government is no longer out of control.