You can't say we didn't have a heads up. Just a few weeks ago, S&P said:
"We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future."
This wasn't even our only downgrade of the week. Dagong Global Credit Rating, a Chinese rating agency you've never heard of (but you will have soon if we don't get our act together) downgraded us as well. Ouch.
What must other countries be thinking as they watch our national circular firing squad?
Maybe out of this miserable moment we can refocus on how to "go big," and come up with reforms that are not only big enough to actually fix the problem, but expand the discussion to solve related problems as well.
First, we will have to do much more to get our debt under control. Think $4 trillion to $5 trillion.
But we have to do so in a way that helps recovery and is conducive to longer-term economic growth. We need less spending on consumption and more on investment, and a fundamental tax overhaul. But we also need other growth-oriented policies -- from an improved regulatory environment to new trade deals.
And I know, there is little appetite for further stimulus, and calls for extending payroll tax cuts and an infrastructure bank feel like warmed-over mediocre solutions, but I'd take another round of stimulus as a mini-insurance and a sweetener for helping to pull together a larger $4 trillion-plus savings deal. Hopefully this will occur in a super committee that decides to exceed its mission with a full-fledged plan. (As I have written here, here are some of my favorite stimulus measures).
The big deal needs to be not just big, but smart too. It should not only include multiyear discretionary spending caps like we just put in place, but new methods of oversight and evaluation as part of the process to ensure that outdated, ineffective, mis-targeted government programs don't live on. Better scrutiny will also help free up room for more public investments in certain areas, such as early education and worker retraining.
We need large and aggressive defense cuts but not through an across-the-board budgetary trigger like we've just put in place. They should instead be the result of deep strategic assessments that have been missing from security policy in recent years. As a budget expert, I can say this is one area where I don't want budget experts making the decisions.
We need a tough health care budget and a variety of structural reforms from a premium support model to a parallel traditional Medicare option to try to stick to it. We have to raise the Medicare eligibility age. We have to reform medical malpractice. We have to ask well-off participants to shoulder more of the costs. Here, we pretty much have to do it all. And then we have to evaluate what works best, and do more.
On Social Security, we should pass the obvious measures of raising the retirement age, fixing the cost-of-living allowance, and means-testing -- that is, reducing benefits for wealthier Americans. But we should simultaneously address other retirement security challenges by creating a new system of add-on, progressive savings accounts that would work like a universal IRA system so all workers would have some savings on top of their Social Security, and overhauling our broken disability system.
The model for tax reform is clear: Like the Bowles-Simpson Commission and the Gang of 6 recommended, we need to dramatically broaden the tax base by eliminating as many as possible of the $1 trillion plus tax breaks the tax code awards annually, dramatically lower rates and use some of the revenues to reduce the debt.
This approach leads to better resource allocation and a simpler tax code -- and it grows the economy. True, the problem is growth in spending and the solution should be highly slanted toward entitlement reform, but this just can't be done without new revenues. We need to raise those funds in the smartest way possible.
We must recognize that the growing income inequality in this country is real and highly problematic. A debt deal will not be able to do justice to the problem, but it should include elements that will help. It should protect programs for the truly needy, cut entitlements for the well-off -- not those who depend on them -- make additional investments in human capital and ensure that the progressivity of the of the tax code is at least maintained, if not increased.
Obviously the list could go on.
Big deals are hard, but small deals are hard too. Might as well try to do something to solve as many problems as possible and hopefully bring more people to the table in support of going big. It would stave off the next downgrade.