Using the Four Horsemen to Cut the Deficit

With Gov. Mitt Romney the presumptive Republican opponent to President Obama, attention is shifting from the interminable primary season to the governor's VP choice, the conventions, and November. But no matter who wins the election, the nation confronts some ticking time bombs that will make short-lived any presidential victory party.

To review the bidding, we face a certain fiscal crisis, which has not been addressed in any way by the budget President Obama submitted to Congress.

Even Rep. Paul Ryan's budget, passed in the House of Representatives, doesn't balance the budget until 2040.

But these competing documents are more political statements than legitimate efforts to do something about the deficit.

Absent action to cut the deficit and slow growth in the debt, we face tough times. Some believe we face European-like stagnation, others see a Greek-like apocalypse.

As the debt grows to match our GDP, or the deficit percentage of GDP expands, we surely face higher interest rates and a weaker dollar, both of which will further roil the economy. Whatever the timing, the certainty of growing entitlement expenses can neither be denied nor hidden, but must be confronted.

Both parties are pushing plans that ensure our debt situation worsens. Republicans are willing to address spending, but they reject any efforts to raise revenue by closing tax loopholes or simply letting the Bush tax cuts expire. Democrats are willing to raise taxes (only on the rich) but will not even consider cuts to entitlements -- Social Security, Medicare, and Medicaid.

So nothing happens. President Obama appointed a bipartisan deficit commission and then ignored its noble "everybody must sacrifice" suggestions. A recent Washington Post story on the 2011 debt limit negotiations with Speaker Boehner revealed a presidential lack of, shall we say, good faith.

So how can we move forward?

Well, first we will have to get through some post-election trauma.

The lame duck session following the November election will face the Four Horsemen of big deficit issues: another debt limit extension; the January 2013 expiration of the Bush tax cuts and the payroll tax cuts; and the 2013 automatic kick-in of $1.2 trillion in spending cuts, absent Congressional intervention.

That means, unless the lame duck 2012 Congress does more than quack, whoever is president in 2013 will face some big issues immediately, such as sudden and painful cuts and immediately higher payroll and income taxes. So far, the "no-new-taxes" Republicans and entitlement-protecting Democrats haven't shown any courage to forge a compromise on taxes and spending.

But there is one scenario that provides hope.

After January 1, 2013, payroll and income taxes will rise from their 2012 rates. As time passes, any Republican action cutting these 2013 rates can be considered a tax cut that is consistent with the GOP's "no-tax" pledge, even if it is higher than today's rates. So Republicans can compromise with Democrats by agreeing to lower taxes from the new higher base -- but not go as low as they are today.

In turn, Democrats may then agree to some reasonable entitlement cuts, such as raising the Social Security retirement age, means-testing benefits, and some changes to Medicaid and Medicare. This scenario allows a dramatically lower deficit going forward. More, it can pave the way for a tougher discussion of lowering tax rates by cutting loopholes.

This optimistic scenario assumes Congress will not address these issues in 2012 and the presidential candidates will not make election-year promises or debate declarations that take action off the table. But at least we can make some lemonade out of the lemons both parties have left us. Their cowardice and inaction on solving the looming fiscal catastrophe will either lead to a real solution or be a prelude to the beginning of the end.