The Least Sexy Headline Ever--Republicans Must Avoid the Static-Analysis Entitlement Trap

OK, that’s a dud headline, but it’s an important topic. So please keep reading. When the preliminary report of the two co-chairs of the deficit commission, Erskine Bowles and Alan Simpson, came out last week, most Republicans dismissed the plan, because it included tax increases. And of course, most Democrats dismissed the Bowles-Simpson plan as well, because it included non-defense spending cuts. But the Establishment--including such pillars of conventional wisdom as the editorial pages of The New York Times and The Washington Post--worked heroically to keep the Bowles-Simpson plan alive, and so now the document is “in play.”

Now some conservative voices are voicing at least guarded support. Over the weekend, the headline in The Washington Examiner’s editorial on Bowles-Simpson read, “A good place to start debating America's fiscal mess.”

The U.S. Chamber of Commerce also provided some cover for tax hikes as well as spending cuts: “Any solution will require commitment and sacrifice on both the spending and revenue fronts.”

And Sen. Tom Coburn (R-Okla.), a member of the larger deficit commission, due to release more findings next month, said of this preliminary report, “If we do the cuts, I’ll go for it.” Then Coburn went even further, adding, “We may have to go for some revenues at some point.” 

So deficit reduction, even tax increases, are front-and-center on the national agenda. One might ask: Didn’t we just have an election in which tax-hikes were rejected? But the larger problem for Republicans, in particular, is that Bowles-Simpson is locked into the sort of bean-counting thinking that takes away the GOP’s best issues: growth and optimism.

Optimism, that is, about the potential for a revival of the transformational economic growth that we witnessed during the Reagan era. And come to think of it, losing that optimistic growth-oriented vision would be bad, too, for the country. So Bowles-Simpson, and the mindset that comes with it, is a trap: a trap for Republicans, and a trap for America.

The trap can be seen in the distinction between static analysis and dynamic analysis. Static analysis applied to tax policy, for example, tells you that if the government cuts taxes by $10, the government has $10 less. That makes sense, of course--but what if the tax cut encourages more productive activity on the part of the tax-cut beneficiary? Then the government wouldn’t lose $10 in revenue, but rather a lesser amount. Indeed, under some circumstances, the government might even gain revenue.

That kind of economic dynamism is called a feedback effect. And so now we are moving over from static analysis to dynamic analysis. Using dynamic analysis, we might show that certain kinds of tax cuts so stimulate the economy that revenues grow, even as, say, capital-gains tax rates fall.

To put it mildly, the static vs. dynamic debate is hotly contested, since it gets right in the middle of the debate over taxes--and, by extension, the debate over the size and scope of government.

Yet there’s another kind of dynamic analysis that is less controversial, even if it is too often neglected, and that’s the dynamic impact of technology and innovation. When we think about the assembly line and mass production, we are thinking about dynamic economic impact; open fields become factories, and the nation is thereby enriched.

In 1987, MIT’s Robert Solow, no conservative, received the Nobel Prize in economics for demonstrating that more than half of the growth in the United States during the first half of the 20th century could be traced to advances in technology. Yet the economic impact of innovation is uncertain and impossible to quantify in advance; even now, budget-minded fiscal types prefer to ignore technology’s positive effect.

Such ignoring of relevant information, of course, might seem more like ignorance. That is, if a reality--technological innovation causes growth--doesn’t fit a bean-counter’s formula, that doesn’t make the reality any less of a reality.

As with tax policy, we see the same static vs. dynamic split over technology policy. And in Washington D.C., the “statics” have the upper hand. Yet fortunately, across the country, the “dynamics” have the stronger argument--an argument based on history.

Back in 1980, President Jimmy Carter attacked challenger Ronald Reagan’s suggestion that a cut in income tax rates would not only revive the economy, but actually generate more revenues for the nation. Carter said that the Reagan tax cuts would lead to deficits “as far as the eye can see.”

Well, the deficit did grow bigger after Reagan won that election and cut taxes, but then the deficit grew smaller, relative to the expanding economy. Indeed, the gross domestic product of the nation, adjusted for inflation, grew by a third during the Reagan years. Just as importantly, the spirit of entrepreneurship flowered across the land; whole new sectors, such as the personal computer and the Internet, blossomed into the billions, then trillions. And so by the late 90s, fifteen years after the Reagan tax cuts took effect, the budget was not only balanced; it was in surplus. In other words, on a dynamic basis, the Reagan tax cuts worked, just as the Gipper had promised. Economists can argue all the data points, of course, but they can’t argue the economic reality, as the American people experienced it: The 80s and 90s were good years.

So now we come back to Bowles-Simpson, and to the not-so-wonderful world of Washington static analysis, where narrow green-eyeshading is always the rule. The folks at the Office of Management and Budget and the Congressional Budget Office--backed up by an array of like-minded groups, such as the Committee for a Responsible Federal Budget--have little or no interest in any kind of dynamic analysis. That makes for bad thinking about tax policy: The Reagan tax cuts never passed muster with the bean-counters--even after they worked.

Moreover, such bean-counting is just as bad for health policy. Earlier this month, for example, Peter Orszag, President Obama’s first OMB director, now perched at The New York Times, praised Bowles-Simpson and the Obamacare health insurance bill passed earlier this year; both, he argued, were vital to future health care cost-containment. But if we read Orszag in his own words, we can see just how static and limited the bean-counting imagination can be:

"There are four ways to contain health care costs: by reducing payments to providers and suppliers; by rationing services; by having consumers pay a greater share; and by giving providers incentives to be more efficient."

So those are the ways to save money on health, according to Orszag: cuts, rationing, and efficiencies. Is there anything else? What about saving money by eliminating disease? No, not in Orszag’s reckoning. So where does, say, the polio vaccine fit in? Alas, vaccines that eliminate a costly disease do not compute to Orszag; they are not one of the four ways listed above, so they must not be a variable. And if Orszag can’t find room in his databank for a vaccine--or cure-strategy, there’s not much chance that his inside-the-Beltway allies will find room in theirs, either. And so the idea of curing our way out of the health care cost-crisis never makes it on to the D.C. agenda.

The point, again, is that a vaccine or a cure is not Orszagian cost-cutting, or rationing--but is the opposite. A cure is abundance: We can all be free of the disease, and if we are, we will be happier and more productive.

Moreover, a cure does not fit into Orszag’s definition of efficiency; instead, it is a paradigm shift, a whole new way of doing things. In the first half of this century, we were spending lots of money dealing with the residual effects of polio--wheelchairs, iron lungs, lost productivity--and yet in the second half of the 20th century, thanks to Dr. Salk and his vaccine, we have spent virtually nothing. We weren’t more efficient in delivering wheelchairs to people; we had invented our way out of the need for wheelchairs, at least for new cases of polio--because there weren’t any. The polio vaccine, we might conclude, was not only a heartwarming medical breakthrough; it was also a deficit reducer.

So as Republicans evaluate various health-budget plans, they should keep asking the dynamic question: “Wouldn’t it be cheaper, as well as more compassionate, if we just cured costly diseases?”

Alzheimer’s Disease (AD), for example, costs the country $170 billion a year, and rising fast. And all that money is spent on care for the afflicted, since there is no cure. Republicans might thus wish to link up with leading figures, including Sandra Day O’Connor and Maria Shriver both of whom have made the argument that a cure for AD is cheaper than care for AD. (Of course, Democrats could make the same linkage, even it would be a 180-degree shift from the static Orszag ethos, so Republicans might hurry in their outreach to Shriver and O’Connor, just to be on the safe side.)

Yet in the meantime, the heavy pall of static thinking hangs over the elite conversation about current spending and visions of what might be possible in the future. On Sunday, the same New York Times published an interactive graphic “puzzle” on cutting the deficit. It’s a nifty little game we can all play, but the problem is that the game-simulation allows only for static solutions. The choices given to the player are two: tax increases and spending cuts. No dynamic solutions are included as options.

What if economic growth went up a point or two a year? What if we cured A.D. and then raised the retirement age? Those imaginative possibilities, and a hundred others for reducing or eliminating the deficit, are not included. And yet we desperately need new ideas, because if fixing the deficit--and the economy--were possible under static rules, such fixes would already be in place. It’s not lack of trying that is crippling the governing elite; it is lack of vision.

If you go down the wrong path, you will never get to your destination, no matter how hard you try. There has to be a better approach. One is reminded of the famous quote from the Nobel Prize-winning physicist Ernest Rutherford: “Gentlemen, we have run out of money. It is time to start thinking.”

Meanwhile, the challenge to Republicans is coming up fast. Having campaigned against the deficit in 2010, what are Republicans now going to do about it? Where is the GOP going to cut? The static-analysts of the Beltway--mostly Democratic, mostly pro-tax-increase, all status quo in their thinking--can’t wait to see the GOP crack up on the rocks of popular opposition to cuts in Social Security and Medicare.

A November 12 headline in The Hill, a D.C.-insider publication, delivered a stern warning: “Social Security reforms could be bombshell for House GOP.” The point of the article is that Bowles-Simpson shares some characteristics with “Road Map for America’s Future,” a fiscal plan released by Rep. Paul Ryan (R-Wis.), the soon-to-be chairman of the House Budget Committee. Ryan’s document, much loved by libertarian conservatives, is static when it comes to senior citizens and the money we spend on them. Ryan’s ideas for changes in Social Security and Medicare--partial privatization, vouchers--are all bean-counting, aimed at saving money. And thus none too popular with the affected population.

Sadly, the dynamic aspect of health care--the prospect of cures--is not mentioned in Ryan’s document. Wouldn’t it be easier to sell, say, a rise in the retirement age for entitlement benefits if we were making progress on Alzheimer’s? Sure it would. And yet the word “cure” does not appear anywhere in Ryan’s 80 pages of policy wonking.

Republicans need to recall their own Reagan legacy: The Gipper never let fear of the deficit drive his economic thinking. Instead, Reagan’s focus was on opportunity: the opportunity for more growth, more innovation, and all the good things that come from such gains--including, over the long run, deficit reduction.

Yes, Reagan was a dynamic thinker, who saw further than most. And so it would make him sad to think that his would-be successors had succumbed to the sort of short-sighted static analysis that he, Reagan, had so decisively defeated in the 1980 election. And it will make Republicans sad, too, if static analysis converts the victory of 2010 into a defeat in 2012.

James P. Pinkerton is a writer, Fox News contributor and the editor/founder of SeriousMedicineStrategy.