The long-term driver of our debt crisis is not discretionary spending but entitlements. One of the most heartening developments of the midterm elections was the success of several candidates who campaigned on entitlement reform, including new senators Pat Toomey, Marco Rubio, and Rand Paul. In the House the reformers are led by new Budget Committee chairman Paul Ryan. Unfortunately these reformers are still in a minority of Republican congressmen, most of whom do not understand the issues nearly as well — an ignorance they share with the public. If President Obama proposes real reform of Medicare and Social Security, Republicans should by all means work with him. They should not, however, hand the Democrats an opportunity to demagogue without the prospect of actually enacting reform. If President Obama refuses to lead on the old-age entitlements, Republicans should concentrate on getting the discretionary portions of the budget, and perhaps Medicaid, under control.
Tax reform probably also requires presidential leadership — but Republicans can move the cause forward by advancing proposals to make the tax code less hostile to economic growth and middle-class families. Capping the deduction for state and local taxes, pruning back the mortgage-interest deduction, and broadening the top tax bracket to include more people should all be on the table, and any proceeds should go toward cutting taxes on investment and expanding the child tax credit. Republicans should not allow their message on taxes to consist wholly of the permanent extension of the Bush tax rates, which over time will put them in the position of defending an unacceptable and unpopular status quo.
Fannie Mae and Freddie Mac represent unfinished business. They were significant contributors to the financial crisis but have not undergone serious reform. Republicans ought to put them on a path to privatization or elimination — and should consult extensively with Peter Wallison, an American Enterprise Institute scholar who sounded the alarm about the government-sponsored enterprises early and has developed several options for moving to a market-based system of housing finance. One promising idea is to shrink the companies’ presence in the market by gradually reducing the size of mortgages they are allowed to buy. They could then eventually be dismantled without disrupting the housing market. Studies have shown that Fannie and Freddie have done little to reduce mortgage rates or increase homeownership, and claims that they are necessary to stabilize the market are at this point a sick joke. Who needs them? Not a reformist, free-market-minded House majority.
The new chairman of the House Oversight and Government Reform Committee, Darrell Issa, is making Fannie and Freddie one of his first targets for hearings, appropriately. All signs are that he will be extremely energetic on all fronts, giving the administration a strong dose of the accountability it has not gotten from the legislative branch over the last two years. As long as he does not get diverted into obsessing over minute scandals, as congressional Republicans did too often in the 1990s, Issa’s work will be welcome and important.
Speaking of scandal, Republicans must have zero tolerance for it in their own ranks. Every new majority comes in pledging purity. Then human nature intervenes. It is always easy to find an excuse for giving your own side a pass — personal relationships and political considerations crowd out ethics and standards. The last Republican majority slid down this path until it became a watchword for corruption. The Tea Party movement is partly a reaction against that self-serving politics, and Republicans had best not forget it.
We should not end on an admonitory note, though. Instead, pause to consider that even before they arrived in Washington, the new Republicans had effectively ended most earmarks, forced President Obama to accept an extension of all the Bush tax cuts, and dealt Senate appropriators a stunning setback by defeating a $1.1 trillion omnibus bill in the lame-duck session. If nothing else, the new Congress will stop Obama’s legislative agenda cold, and that in itself is a wondrous change from the last two years of arrogant and overweening liberalism. Operation Rewind can’t truly succeed without a Republican president in 2013. If congressional Republicans help set the table for one, they will have done their part in inaugurating a historic era of conservative reform.