COLUMN: Why Obama must prevail for a 'grand bargain' - David M. Walker
June 21 (Reuters) - It's been a while since we've had good news about the U.S. economy, so the recent upbeat reports are welcome. The federal budget deficit picture for 2013 has brightened a bit, along with an upturn in the housing market. Yet those developments don't tell the full story. Our economic horizon remains cloudy due to serious structural challenges.
In fact, this improving economic picture threatens to diminish our sense of urgency about striking the needed "grand bargain" to address our fiscal disease. That shouldn't happen and Washington policy makers should use the continuing talks about fiscal 2014 appropriations levels to nail down a framework for the deal we all need.
First, let's look at the good news in context. Several weeks ago, the Congressional Budget Office reported that the federal budget deficit for fiscal 2013 will be $642 billion. That's a substantial drop from 2012s $1.1 trillion deficit. But several significant reasons for the decline are unusual events: large dividend payments from Fannie Mae and Freddie Mac; savings from the ill-conceived and unsustainable sequester; and accelerated tax revenues from wealthy individuals anticipating the fiscal cliff.
More good news came in recent weeks with signs of strength in the housing market: an upward trend in home sales and housing starts. Yet unemployment remains stubbornly high, at 7.6 percent, and investors are nervously wondering how much and how quickly the Federal Reserve Bank will pull back on its monetary stimulus program.
Washington policy makers, however, still haven't addressed the three key drivers of our structural deficits: our aging population, our rising healthcare costs and our outdated, unfair and overly complex tax system.
It is estimated that our best measure of fiscal health, debt level as a percentage of gross domestic product, is on a fairly flat path for the next decade. But those three issues will cause the debt-to-GDP percentage to soar in the out years, unless we agree on serious, structural reforms.
It's not enough to stabilize the percentage. We must get it on a downward path to prepare for the looming demographic impacts and also give Congress the fiscal flexibility to deal with unforeseen emergencies.
Above all, we need to consider economic need and political reality.
First, we need to invest more in critical infrastructure, as well as research and development, to increase economic growth, reduce unemployment and enhance our competitive posture. It's politically unrealistic, however, to expect to be able to do so unless it is coupled with actions designed to address our structural deficit challenge.
Second, Congress will likely be focused on midterm elections next year, and then move into the intense campaign mode leading up to the 2016 presidential election. Unless we act soon, it's possible that Washington politicians won't get serious about grand bargain negotiations until 2017. We can't afford to wait that long.
Agreeing on a framework is still possible this year. It can be achieved as part of congressional appropriations negotiations.
To be clear, a deal should not be pursued as part of the coming debt ceiling face-off. President Barack Obama has already said that he won't negotiate over the debt ceiling. So it should be off the table as a bargaining tool. We should instead lift the debt ceiling through the 2014 election, and eventually replace it with statutory debt-to-GDP targets and a constitutional amendment establishing a debt-to-GDP "credit card" limit.
What makes good sense, however, is to link a grand bargain framework to the current negotiations over next year's appropriations. Those discussions will likely continue through at least September, and naturally have the sequester as a focal point. Neither Republicans nor Democrats want the sequester to continue and their mutual desire to do away with this ham-handed policy may be the opening we need to reach a substantive fiscal deal.
Republicans and Democrats should now get behind replacing part of the sequester and seek further long-term deficit reduction through three key steps.
First, both parties should agree to specific reductions in mandatory spending, including a first step in genuine reforms to Medicare, Medicaid and Social Security. These could involve adjustments to Medicare premiums so wealthier seniors contribute more, reforms to the Medicaid provider tax that will prevent states from gaming the system, and a change in inflation indexing.
Second, Congress should set a target for further reductions in social insurance spending, and charge relevant congressional committees to come up with the savings. We don't need to create another "super committee" - which would likely prove another super failure.
The more credible, and politically palatable, approach is to go through the committees of jurisdiction, with open hearings and complete transparency. These should be coupled with a series of fact-based and solutions-oriented town hall meetings across the country involving the president and bipartisan congressional leaders.
Third, our elected officials should set a target for additional revenue through tax reform, and assign relevant congressional committees to do this. Though both parties have expressed a desire for tax reform, the sticking point has been whether it will generate more revenue. The Republicans might agree to increased tax revenue if meaningful social insurance reforms that achieve significant long-term spending reduction are part of the overall package.
If these elements are adopted, we could reach a fiscal deal that can pave the way for long-term growth and prosperity. In this way, today's short-term good news can result in a better and brighter tomorrow.