Budget battle defining moment

May 1, 2011

Without overstating the obvious, the upcoming battle over the budget is a defining moment in the history of the republic.

Both the Paul Ryan budget plan and President Barack Obama's budget envision a different America. The Ryan budget, which has no chance of becoming law in this Congress, projects lower deficits with government spending at 20 percent of gross domestic product while the president's budget projects lower deficits with government spending at 24 percent of GDP.

The one that provides the framework of what becomes law will have far-reaching effects. Ryan envisions a future that reshapes entitlements. The Medicare proposal shifts the problem of cost containment to the market and to the states via block grants. The president's vision is to continue the status quo with decision-making in the hands of boards housed in Washington.

Although one would be hard pressed to show that government bureaucracies can successfully contain costs, such proponents are hardly swayed by evidence to the contrary. What has been interesting is that the president rejected the recommendations of his own debt reduction committee in toto and has offered up a budget that locks in higher spending levels and higher taxes.

His attack on the Ryan budget was stunning in its vitriol. It showed the president as an ideologue and left little ground for compromise. This president is no Bill Clinton, who signed into law NAFTA and welfare reform, nor a Ronald Reagan, who compromised on the implementation date of tax cuts and on Social Security.

Yet without compromise, the country will be in the familiar territory of continuing resolutions with no budget. Without compromise, there will be no raising of the debt ceiling. Yet there should be no compromise on raising the level of government spending to 24 percent of GDP. Traditionally this level is below 19 percent and 19 percent is an important number.

Obama may think he can get government revenues up to 24 percent to balance his budget, but he ignores the evidence of history.

As I have pointed out before in this space and as Alan Reynolds recently wrote in the Wall Street Journal, all the fiddling around with taxes and tax rates does not change the percent received by Washington. It is 19 percent. The only difference is that GDP falls when tax rates go up and GDP rises when tax rates go down.

A hike in taxes to achieve 24 percent will lower GDP and make us all worse off. Here Republicans must draw a line in the sand. They should approve no budgets with spending and taxes in excess of 20 percent of GDP. It is interesting that some have called Barack Obama the worst president in history. While that is debatable, there should be little debate that he is one of the most important presidents in history. There are few presidents who alter history. Abraham Lincoln was one and Barack Obama is another. And just like the election of 1860, the one coming in 2012 will define the future of the country.

Dr. Harold Black is the James F. Smith Jr. Professor of Finance at the University of Tennessee. He can be reached at hblack@utk.edu.

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