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Smart Debt and Stupid Debt

Why we need to start recognizing the difference.

Washington—There is a pathetic quality to our discussion of deficits and fiscal responsibility because we never face up to how much we need government to do.

Our debates are also characterized by a politically convenient amnesia. Just a decade ago, we were running surpluses so big that Alan Greenspan, then chairman of the Federal Reserve, worried about what would happen once our national debt was liquidated. We had this problem well in hand until we started waging wars and cutting taxes at the same time.

What would a rational approach to the budget look like? It would begin by accepting that running deficits at a time of high unemployment is a good thing. We would celebrate the fact that the world's governments were far wiser in this downturn than their counterparts were during the Great Depression.

It is a hugely underrated achievement of international cooperation that the world's 20 leading economic powers pumped trillions of dollars into the global economy to prevent collapse. Catastrophe was averted and growth, although sluggish, has resumed.

True, unemployment in our country is still too high. But the lesson here is not that President Obama's economic stimulus failed but that it was too small to do all that needed to be done. Those who would just repeal stimulus spending -- the bright idea of the House Republican Study Committee -- would take us backward.

Yet no one should doubt that we must put our long-term fiscal house in order. The discussion should not be confined to Medicare, Medicaid and Social Security. We need to ask a basic question: What do we want government to do and, yes, how much will taxes have to go up so we can pay our bills?

Whether we like it or not, government will grow in the coming decades because the private economy will not offer the same security it once did through employer-provided health and pensions plans.

In health care, the status quo means that more and more Americans will find themselves without insurance because an ever-growing number of employers simply won't be able to afford the expense. This is unsustainable. Enacting health reform now will allow us to plan how government can take on these costs gradually.

As for retirement security, most Americans know their private pensions will be nothing like those enjoyed by their parents or grandparents.

So reforming Medicare and Social Security can never be a simple matter of cutting spending. We have to look at the entire health care picture and rethink our whole retirement system.

Rep. Paul Ryan, R-Wis., has gotten credit for doing a version of this in his "Roadmap for America's Future." He proposes to balance the budget by, among other things, turning Medicare into a voucher program and partially privatizing Social Security.

Ryan gets points for being a genuinely nice person, and because he says outright what many other Republicans only mumble. But the path he suggests is exactly wrong. Weakening social insurance is the opposite of what the country needs to do now, and it doesn't even get us to fiscal nirvana. Ryan's plan, according to the Congressional Budget Office, would still leave us with a deficit of 5 percent of GDP in 2034 and would only then start dropping.

Nor does our current debate address what government must do to keep our country competitive. Our physical plant -- schools and roads, bridges and airports -- is crumbling. This calls for new investments in transit and energy, and in higher education, new technologies and research. We have forgotten the Dwight Eisenhower lesson: that government investment is essential to private-sector growth.

So how should the various deficit-reduction commissions, including the one Obama created, proceed? Here's a three-step plan.

First, start not with "entitlements" but with a broader assessment of what we will ask government to do over the next two generations. Be candid about priorities. This includes entitlements. It also includes what we should spend on national defense.

Second, offer a menu of the fairest and most economically efficient ways of raising the revenues to pay for it.

Third, propose a capital budget for the federal government so debt can be used the way it's supposed to be used. Except in bad economic times, we shouldn't borrow to cover government's day-to-day costs. But government activities that enhance the prospects of future generations should be financed over time, much as successful companies use debt for long-term investments. There's smart debt and there's stupid debt. We need to start recognizing the difference.

E.J. Dionne's e-mail address is ejdionne(at)washpost.com. (c) 2010, Washington Post Writers Group

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