Focus on Fundamentals

Pete DuPont Bio PicThe current economic debate is an exercise in missing the point.

Commentary by Pete du Pont
December 30, 2012

Source: Wall Street Journal

“If we’re going to raise revenue and if we’re going to raise it in any form, then we darn well better cut spending, because spending is the biggest part of this problem,” said Erskine Bowles, Bill Clinton’s onetime chief of staff, earlier this month. The most important words in American public policy today should be “we darn well better cut spending.”

Unfortunately, most of the conversations about the fiscal cliff miss this point. They center not on how much spending should decrease but how much taxes should increase. That bodes ill for America’s economic growth and global competitiveness.

Instead of debating whose taxes should go up, we should be talking about how to keep everyone’s tax rates as low as possible. And we should be talking about the major steps needed to removes obstacles to our long­ term economic health and competitiveness, not just small change to avert an immediate crisis.

We must focus on four areas that are central to the long­term challenges we face: reducing the amount our government spends to more reasonable levels, reforming entitlements to keep those important programs healthy for future generations, reforming the tax code to make it an efficient engine for economic growth, and unleashing America’s energy potential.

It is very clear that the federal government spends too much. Annual spending has grown from $3 trillion to $3.8 trillion over just the past four years, or 18% beyond inflation. Looked at another way, federal spending grew over this period from 21% of gross domestic product to 24%; annual deficits grew from 3% of GDP to 8%; and our national debt has grown by more than $5 trillion.

No nation can compete globally with such levels of spending and debt. American businesses and families have done what they always do in lean economic times: cut back and prioritize their spending. It is time for the federal government—and many state governments—to do the same. We must get federal spending back down to around 18% to 20% of GDP and can do so by getting our priorities straight.

No attempt to rein in spending will be successful unless it addresses entitlement programs. Social Security has already reached the point where it is paying out more each year than it brings in. It faces unfunded liabilities of trillions of dollars and is expected to run short of money to pay promised benefits in two decades. Medicare also has trillions in unfunded liabilities.

Washington needs to take steps now to address these long­term issues. We need more choice for Medicare recipients, more flexibility for states in administering Medicaid, and changes in Social Security that address changing demographics (increasing the age needed to qualify for full benefits, pegging benefit calculations to inflation instead of average wage growth, and thinking about some form of means testing). The liberal approach is best described as simply spending more and rejecting fundamental reform. We must correct that thinking before the entitlement crisis hits us full on and we’re forced into truly draconian steps.

In addition to spending control, continued U.S. global competitiveness requires tax reform. We need a tax code that will encourage rather than deter business expansion and growth in this country. Our last such reform was enacted in in 1986, when President Reagan worked with Democrats in Congress to make the tax code fairer and flatter by lowering income tax rates across the board (with the top individual rate falling from 50% to 28%) and broadening the tax base by reducing or eliminating limiting loopholes, credits and deductions.

Real tax reform today would include lowering business rates so they are no longer the highest in the developed world. Reform would keep individual rates low by extending the Bush rate cuts and by repealing the new taxes on investment income that start Jan. 1 under ObamaCare. Reform would address once and for all the alternative minimum tax trap that threatens to ensnare millions of middle­class families each year. And as in 1986, real reform would include eliminations or reductions of the tax deductions, credits and exceptions that create economic inefficiency.

An economically robust and globally competitive nation also needs energy to be readily available and affordable. We must take advantage of the huge energy resources we have in our country by reversing Washington’s predisposition for inefficient and costly sources at the expense of those that are abundant and affordable. We see Washington’s efforts to hold down domestic oil and gas production with slowness in the permitting process, closing off of resource­rich areas, and failure to encourage the revolution in natural gas production. Coal fuels close to half of our nation’s electricity generation, so of course we see new onerous regulations on coal­fired electricity plants. Such efforts increase the cost of these readily available energy sources, thereby making energy, food and other things more expensive for families and businesses.

The above four areas are critical for economic growth and continued global competitiveness. We could add deregulation, not just as noted above but also in education and health care; a renewed push for individual freedom and a shift away from what is rightfully called the “nanny state” toward our roots as an “opportunity society.” These steps will not be easy, but they are necessary if America is to regain its strong economy and maintain its global competitiveness.

John C. Goodman is President of the Goodman Institute and Senior Fellow at The Independent Institute. His books include the soon-to-be-published updated edition of Priceless: Curing the Healthcare Crisis, the widely acclaimed A Better Choice: Healthcare Solutions for America, and New Way to Care: Social Protections that Put Families First. The Wall Street Journal and National Journal, among other media, have called him the “Father of Health Savings Accounts.”