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In today’s Washington Post, Sebastian Mallaby opines (in “A Moment for Fiscal Courage”) that the economy’s in too bad a shape to expect anything but more deficit-financed fiscal stimulus.  But he urges that fiscal restraint must be demonstrated nonetheless, lest our line of credit further evaporate and further threaten the stability and longer-term health of our economy.  He concludes with this prescription (my emphasis added):

The best way to demonstrate that a stimulus won’t bust the budget and, therefore, to create room for a bigger one is to address the budget’s greatest problem head-on. A short-term stimulus should be coupled with a medium-term plan to fix entitlements.

Yeah, right, you’re thinking; telling politicians to fix entitlements is like telling alcoholics to drink milk. But if today’s economic mess teaches anything, it is the danger of mortgaging the future and living beyond one’s means. The federal entitlement programs, which are projected to drive an eightfold increase in the nation’s debt-to-GDP ratio by 2050, are the governmental equivalent of a no-doc loan with a spring-loaded reset. If ever there will be a time to speak honestly with the American people about entitlements, surely this is it.

But reform of those “entitlement programs” (referring primarily to Social Security, Medicare, and Medicaid), although surely needed over the longer term, won’t demonstrate fiscal discipline over the “medium term”–which I consider within the next decade (or even two). 

Over the next 10 years, the expiring tax cuts (in particular, the “Bush tax cuts” enacted in 2001 and 2003, which will expire at the end of 2010)–and how we choose to renew and pay for them–represent a much larger, executable policy lever than Social Security or the health entitlement programs.  If you look at the long-term budget projections of the Congressional Budget Office (CBO), in the next 10 and 20 years, the projected growth in Social Security spending (+0.7% of GDP in 10 years and +1.7% of GDP in 20 years) will be far less than the difference between projected revenues in the “extended baseline” scenario compared with the “alternative fiscal” scenario (+1.7% of GDP in 2018 and +2.3% of GDP in 2028).  Policymakers wouldn’t touch Social Security benefits within that 10-20 year timeframe anyway, even if they might enact reforms by then.  And although the growth in Medicare and Medicaid spending over 20 years is still larger (+3.4 to 3.7% of GDP), CBO’s projects little difference in this health spending between their two scenarios (that’s the 0.3% of GDP range)… Why?  Because at this point we don’t know enough about policy options that would significantly reduce health spending–even if we recognize that’s the big fiscal problem for the longer run, and even if we’re working hard to keep learning what we can do about it.

So here’s what I see as the “medium-term” fiscal courage we really have the opportunity to muster:  comply with pay-as-you-go (PAYGO) rules on tax cuts going forward–i.e., stick to revenue neutrality relative to the current-law baseline.  I’ve said it before, that revenue neutrality in a strict pay-go sense is hard to do, but that’s exactly what makes it “fiscally courageous.”  Neither of the presidential candidates has pledged to do that, yet it’s what I see as the very first test of the next President’s and the next Congress’ commitment to getting our fiscal condition and the longer-term prospects for the U.S. economy back in order–i.e., their very first real test in fiscal courage.  So far, neither Senator McCain nor Senator Obama seems willing to be as fiscally courageous as the House Democrats were in the House-passed budget resolution–a budget plan that achieved a balanced budget within four years (i.e., a first presidential term) using real numbers based on a mathematically-transparent, but obviously politically-difficult, rule:  pay for the tax cuts you want to keep. 

(UPDATE 8/12:  see this 8/10 Washington Post story by Lori Montgomery on the revenue baseline issue and the candidates.)

Combining the expiration of the Bush tax cuts with a renewed commitment to pay-go (as measured against current law) would provide impetus for a much needed fundamental reexamination and reform of the federal tax system.  If we can find ways to raise needed revenues more equitably and efficiently, it will make tackling our longer-term fiscal challenges–those facing us for generations to come–much easier.

So I’m willing to give up on short-term fiscal courage, given the gloomy state of the current economy and the political reality of this being an election year.  And I can understand the lack of medium-term fiscal courage being voiced by the presidential candidates while they are short-term campaigning.  But once the new President’s in office, his first test of fiscal courage will be what to do with the tax cuts, and I’ll be waiving my pay-go banners, cheering him on.