President Obama said yesterday, “The only question is whether politics or ideology are going to get in the way of preventing a government shutdown.” This is indeed the interesting question: Is politics motivating the Republicans, or ideology? I realize that Obama meant to ask whether the government would be shut down. But humor me while I interpret the sentence the other way:   Politics versus ideology.

Most of what the Grand Old Party has done in the last two years can much better be explained by politics than ideology. For example, only politics can explain a systematic strategy of opposing whatever the White House favors, even when this requires changing one’s vote — for example on the fiscal commission bill that Senators like John McCain had previously been sponsors of. Only politics can explain the long-time refusal of so-called fiscal conservatives to name the specific spending programs they want to cut.

On Tuesday Representative Paul Ryan unveiled a new long-term budget plan that apparently comes closer to naming the specific programs he wants to cut.   Medicaid and Medicare.  Perhaps we are getting closer to the point where we can actually have a debate over ideology, over competing policy priorities. This would be an improvement over the nonsense that has passed for public debate in recent years.

If so, let us be clear that, despite the rhetoric, the policy priority of the Tea Party and Paul Ryan is not fiscal conservatism. Fiscal conservatism is supposed to mean the reduction of budget deficits, paying for what you spend, matching tax revenue to expenditure. Someone who was sincere about eliminating the budget deficits that we have inherited would propose a long-term plan that included roles for raising tax revenue and cutting defense spending, in addition to slowing the growth of entitlements and domestic spending. But the tax cuts in the Ryan plan in fact would lose revenue almost equal to its spending cuts. In other words, it mostly uses the cuts in federal medical care spending to pay for more tax cuts.  This pattern is not new. The supposed fiscal conservatives who were elected to Congress last November have increased the budget deficit. Their insistence on renewing the Bush tax cuts (for the rich, as usual) has added hundreds of billions of dollars to the current deficits, outweighing all the specific spending cuts that they have proposed, combined. Other ways they are adding to the deficit include trying to cut funding for IRS enforcement and trying to repeal the Obama health care reforms. (The Ryan plan would repeal the health reforms, but ignores that doing so would add to the deficit according to CBO’s scoring.)  These choices follow the tradition of those “fiscal conservatives” Ronald Reagan and George W. Bush whose budgetary policies created the majority of the national debt we have to live with today.

Even though Obama’s opponents in Congress cannot sustain the claim of being fiscal conservatives, it is possible that some will now genuinely lay claim to the other two-word ideological phrase: “small government.” Do they want to, finally, come out and say explicitly that their goal is to cut domestic spending (especially entitlements) in order to cut taxes, putting the priority on shrinking government rather than eliminating the budget deficit? Are they prepared to own Dick Cheney’s claim, “Reagan showed that deficits don’t matter”?

I am not sure if they are.  Ryan said Sunday “We are going to put out a plan that gets our debt on a downward trajectory and gets us to the point of giving our next generation a debt-free nation.” This incredible sentence suggests that he still lacks the requisite numeracy (or sincerity) that many have inexplicably attributed to him. The numbers in the plan that he proposed two days later don’t come close to the headline claims of shrinking the budget deficit by $4 trillion cumulated over the next decade, let alone eliminating it altogether.   But does Ryan even understand that to pay off the debt that Reagan and Bush bequeathed us we would have to run $100 billion surpluses for a hundred years?

Arithmetic and history.  Two of my favorite subjects in school.  I covered some history two posts ago (the Whisky Rebellion).  Let’s do some arithmetic now.

Attention is currently focused on threats of a government shut-down, either when a continuing resolution is required from Congress in March in order to keep the government operating, or a few months later, when an increase in the national debt ceiling is required.  The common description of this showdown as a high-stakes game of chicken has it right.   But some of the Tea Partiers say that their goal is literally to avoid an increase in the debt ceiling - not just as a bargaining ploy nor as an abstract goal, but in the sense that they want to cut spending so sharply that there is no need to borrow any more after this spring.   Similarly, Senators Mike Lee (Utah) and John Kyl (Ariz.) have revived the proposal for a constitutional amendment requiring a balanced budget.  And of course they all want to do it without raising taxes, and in most cases without cutting defense, Social Security or Medicare.   Oh, and don’t cut farm subsidies either.

Not many people want to spend the time learning about the specific options or making the choices that would be necessary in order genuinely to solve the budget situation, even though a couple of useful websites make it relatively easy to think through the alternatives (NYT or PPC).  

But the proposition that we could eliminate the budget deficit through sufficiently drastic cuts in domestic spending is so far out of line with reality, that the point can be made easily to even the most innumerate congressman.  Here is the arithmetic. 

Total federal spending is $3 ½ trillion in round numbers.    That spending number minus tax revenue left a budget deficit of $1.3 trillion in fiscal year 2010.   Putting aside a very small number of genuinely sincere libertarians like Ron Paul, most Republican congressmen want to exempt defense spending and senior-related spending (Social Security and Medicare), and to make all the cuts in non-defense discretionary spending.  (That was their official platform in November’s election.)     How much would you have to trim non-defense discretionary spending to balance the budget?   Start — as many people would like to – by eliminating all foreign aid.  Contrary to what they think, foreign aid is of course only about 1% of total outlays.  Next imagine zeroing out all of veterans’ benefits, all federal spending on education, and all federal spending on transportation.   That includes programs so popular with their beneficiaries that the congressmen voting for them would be virtually certain to lose re-election.  But some of the freshmen say they are willing to pay that price, so let’s go full speed ahead.   We are only up to 6% of total outlays.   Now eliminate every dime of non-defense discretionary spending: parks, weather service, food safety, SEC, FBI, border patrol, politicians’ salaries… everything.  Do you think that closes the gap?    It only gets you half way there!   Domestic discretionary spending is not where the big bucks are.

The arithmetic in fact works out quite simply.    Of the $3 ½ trillion in federal outlays, just under 1/5 is non-defense discretionary spending.   Another 1/5^th is defense.   Social security is the third 1/5^th.    Medicare is the fourth 1/5^th (slightly less now, but far far more in the future).    The last 1/5^th is interest on the debt (which will also grow enormously in the future) plus other entitlements.    Numerically speaking, we would have to eliminate not just all non-defense discretionary spending, but also all defense.  Or else all social security spending (but we would have to continue somehow collecting the payroll taxes that are supposed to fund it!).   Or else all Medicare spending.   The unmistakable implication is that a solution to our long-term fiscal problems will have to involve some sharing of sacrifice among each of these five categories.    And increased tax revenue as well.    

Admittedly, the Republican leadership’s goal for the current fiscal year was to reduce domestic spending by “only” $100 billion.   But the freshmen’s position is that this goal is not enough.  (At the same time, they are unable to come up with that much in specific cuts that they are willing to put their names to, for the same familiar reasons.  Domestic discretionary spending is not where the money is.)

A reasonable medium term goal might be to raise taxes as a share of GDP at least to 18%, what it was during the Reagan administration, and to lower spending to 23%, what it was then as well.   Of course these two numbers still leave us with a deficit of 5% of GDP, which was Reagan’s record.  It will take us much longer to get back to the fiscal rectitude of Clinton.   It is not possible to eliminate the need to borrow, in the short run.   

As for the long run, as we all know, the baby boomers are starting to retire and the trends in Social Security and (especially) Medicare are unsustainable.   Ten years ago, if the country thought it was important enough to protect any single category against belt-tightening in the long run - say social security or taxes - it would have been arithmetically possible, by making the cuts elsewhere.    But we no longer have the luxury of such choices after the legacy of the last decade — after the effects of mammoth tax cuts (starting in 2001 and 2003), two wars (2001, 2003), the Medicare prescription drug benefit (2003), and the severe financial crisis and recession (2008).   Starting from our current position, each of the five components must play a role, along with taxes.

Many commentators faulted President Obama for not proposing to cut entitlements when he submitted his budget in early February. They sanctimoniously intone that a true leader would realize that the public wants to hear the truth.   I don’t understand how they can say that with a straight face.   Obama came into office with a mature desire to put childish things aside and a naïve eagerness to be bipartisan.  The response he got was accusations of death panels, an explicit Republican strategy to deprive him of legislative successes (no matter what their content), and the electoral defeat of moderate congressmen in both parties. People who say that Obama should stick his neck out to support some of the radioactive proposals of the Bowles-Simpson deficit-reduction commission have apparently forgotten that he originally asked for ex ante bipartisan blessing for the formation of the commission and a congressional vote on its recommendations, but the Republicans refused.  

It is clear as day that if he broached the sort of specific proposals that are necessary, such as raising the retirement age in the distant future, he would be attacked simultaneously for hurting seniors and for not going far enough fiscally (and it would in many cases be the same people making both attacks, inconsistent as that is).  The point is not just that he would hurt himself politically.  The point is that the inflammatory attacks on the proposals would then entrench positions and make it harder to enact the reforms in the future, not easier.  The White House has explained the danger of “poisoning the well.”  There is no alternative to preserving the true remedies for some future venue where both sides are willing to join hands and make the necessarily compromises together.   We have known this political fact for 30 years.  Savvy media commentators would do the same if they were working in the White House; but they don’t consider that criterion relevant when fashioning their critiques.  They have their own audiences to play to.

Question from the National Journal: “President Obama and his team said recently that the fiscal 2011 budget will represent a credible effort to reduce budget deficits and put the federal government on a path toward “sustainable” deficits …How would you alter taxes and spending to achieve (or at least pursue) that goal? ”

Here are my ten proposals to move the budget back to a sustainable path (like the one it was on until January 2001):

First, auction off most greenhouse gas emission permits, rather than giving them away to firms (which would confer windfall profits). This is what President Obama originally proposed last February, but it is not in the congressional climat change legislation.

Second, raise the gas tax. Among the benefits, besides raising revenue, would be reducing traffic congestion, accidents, pollution, the trade deficit, and dependence on Mideastern oil.

Third, cut agricultural subsidies to rich farmers and agribusiness, saving money and improving economic efficiency. This is another measure that Obama proposed when he first took office, but that was rejected by Congress.

Fourth, continue to cut expensive weapons systems that the military doesn’t want, but have in the past been been kept because the suppliers are in the districts of influential congressmen.  President Obama and Defense Secretary Gates have, amazingly, managed to do this with the F22.

Fifth, end manned space exploration. We don’t need it. Spend half the money on useful science instead, including research on energy and medicine (and unmanned space exploration).

Sixth, let George W. Bush’s tax cuts for the rich expire as under current law. Of course the Bush plan to eliminate the estate tax completely in 2010 and have it bounce back to its 2001 level thereafter is absurd.  We should instead level out the taxable threshold at some reasonable estate size: a few million dollars, something high enough to de-legitimize the hysterical stories about inheritors supposedly being forced to sell their small farms or small businesses to pay the tax.  (Use some of the revenue in these proposals to fix the Alternative Minimum Tax once and for all. And, in the meantime, continue Obama’s return to honesty in budget accounting regarding the costs of AMT, wars in Iraq and Afghanistan, tax cuts, etc.    Bush’s habitual trick of purposely understating such costs in future budgets allowed him to pretend that we could afford his profligate fiscal policies, which in turn added far more to the national debt than the current recession measures have added.)

Seventh, encourage hospitals to standardize around national best-practice medicine – to pursue the checklist that minmizes patient infections and to avoid unnecessary medical tests and procedures – using levers such as making Medicare payments conditional on these best practices. This is another part of the Obama plan.   (Don’t pursue the logic of radio talk show propaganda, which labels even modest government involvement in health care as “socialism,” because that logic would require dismantling veterans’ hospitals, which provide good medical care relatively efficiently, even before it would require dismantling Medicare.)

Eighth, limit or eliminate the tax-exemption for employer-paid health insurance (as proposed by Senator McCain), at least the Cadillac plans which are very expensive but don’t even pay off in health results (as proposed by Senator Kerry).

Ninth, ideally, eliminate the tax deductibility of mortgage interest too. I realize proposing this would be political suicide. Congress and the public are still virtually unanimous in wanting to tilt the playing field in favor of owner-occupied housing and against rental housing and the rest of the capital stock, notwithstanding that such policies contributed to the housing bubble and crash.

Tenth, to save Social Security, raise the retirement age (just a little), tax higher incomes (just a little), and progressively index benefits for future retirees to price inflation, rather than to wage inflation (just a little).

(To post comments, go to the Roubini Global Economics version of this post.)