Obama's deficit plan: Let the debate begin

In Washington, it seems as if everyone has a plan to reduce federal deficits and the pileup of debt that yearly deficits create. Today, President Obama finally offered his plan, a contrast to that of House Republican Paul Ryan. Now a full debate can begin.

And what a debate it will be. The clash over federal spending just for the remainder of this year went to the 11th hour last week, narrowly avoiding a government shutdown.

The next political trigger will come when the United States bumps up against its debt limit of $14.3 trillion next month, and Congress faces a vote to extend it. House Speaker John Boehner has said Republicans will not increase the debt ceiling without getting “something really, really big” to reduce the deficit.

Washington is quaking over this next fight (one senator characterizes it as “Armageddon”), and the budget battles for 2012 and beyond. As Mr. Obama said, the debate is about more than “just numbers on a page.”

It’s about competing visions of government and how that affects individual lives. It’s about the health of the American and global economy. And, as politicians well know, it’s also about the coming elections.

The stakes are high, and the fighting is bound to be fierce. But Washington can take courage in the fact that Republicans and Democrats have cooperated over tough budget matters in the past. In the 1990s, they came together over a balanced budget agreement. And last week, as excruciating as it was, did show that even this present polarized Congress can hammer out a deal.

Lawmakers can also find encouragement in the abundance of plans out there: that of Representative Ryan, bipartisan plans by budget experts, the president’s plan, and one being worked on in the Senate by a group of Republicans and Democrats known as the Gang of Six. It’s not as if no one has given this much thought.

The plans take different paths, but they at least have similar destinations. Ryan’s would reduce the deficit by almost $6 trillion over 10 years; the one put forward by Obama’s bipartisan commission in December would cut it by $4 trillion over the same time frame, and Obama’s aims for a $4 trillion cut over a dozen years.

Both Obama and the Senate Gang of Six build on the work of the president’s bipartisan commission. That commission, in its December report, suggested that three-quarters of deficit reduction come from spending cuts and one-quarter from additional tax revenue, mainly in closing tax loopholes. However, the commission was vague on how to rein in the soaring costs of Medicare and Medicaid.

The more ambitious Ryan blueprint cuts taxes. It turns Medicare – the federal health program for seniors – into a voucher system in which those who are now under 55 years old would receive subsidies to buy among competing private plans. Medicaid, the health program for the poor, would be run by the states with federal money, or block grants.

Obama today criticized both moves as shifting costs to the elderly and the poor, but at least the Ryan plan is far more specific than the president’s entitlement reforms. He touched on Social Security but laid out no plan; he relies on measures such as more generic drugs to bring down health costs.

Taxes and health costs. These will be the flash points. Politicians may be tempted to debate them all the way to November 2012. But financial markets – the ultimate arbiters of a country’s credit-worthiness – may not have that much patience.

Warning of the consequences of doing nothing, the International Monetary Fund this week released a report saying the US lacked a “credible strategy” to tackle its mounting debt. Among advanced economies this year, it stands alone as a country still increasing its underlying debt, and runs the risk of endangering the global economy, the IMF said.

That is one warning among many that Obama must work with his fellow Democrats and the GOP to solve this problem. A good place to start is also the hardest: entitlement reform. Financial markets know that this is the change that really matters, and if done well, it will be the one big reform that will stick in the long term (compared to tax reform). Obama made only a halting start down that road today.