I’d like to thank Reihan for inviting me to contribute here at The Agenda. As it happens, I am currently attending the Kauffman Foundation’s second-annual Economic Bloggers Forum, even though I am not ordinarily a blogger. (I do write a weekly column on fiscal policy for RealClearMarkets.) So, if nothing else, Reihan’s invitation makes me technically an economic blogger.

I think Reihan’s description below is right: the key fiscal policy challenges facing government today relate to long-term cost growth in existing government programs. For states and local governments, the greatest pressures are from Medicaid and public employee benefits and pensions; at the federal level, the key problems are Medicare and Medicaid (and, to a lesser extent, Social Security). If passed, I suspect the health care bill will somewhat worsen these pressures.

Because entitlement costs are growing faster than tax revenues, government budgets left on autopilot will grow larger and larger budget deficits, to a point that will eventually be unsustainable; under current CBO assumptions, federal public debt as a share of GDP will approach 100% of GDP by the end of the next decade, compared to 42% in 2008.

Fundamentally, there are two ways to fix this problem: raise taxes, or cut spending. I hope to use my contributions here to elaborate on these options and their advantages and disadvantages.

On the tax side, it is important to note that the government can raise some more money with taxes focused exclusively on the rich, but not enough to make budgets sustainable over the long term. Eventually, scheduled entitlement spending growth will make middle-class tax increases necessary, most likely in the form of a VAT.

On the spending side, entitlement savings are simple to realize, but not easy. Reforms like raising retirement ages, means testing, and reducing the speed of benefit growth can save a lot of money. They are also a very tough sell politically, and in the case of Medicare, they’ll only work if they go hand-in-hand with reforms that cut health care costs overall.

Few political leaders in Washington have made proposals to deal with the long term fiscal gap. On the Left, Democrats do not want to propose a middle class tax hike until it’s economically necessary, and we’re not quite there yet. On the Right, most Republicans seem to have concluded that defending Medicare is more politically productive than reforming it. I suspect debt/GDP will have to approach 100% before political leaders are mostly willing to take on the fiscal imbalance.

A notable exception is Rep. Paul Ryan; both Reihan and I have written on his Roadmap plan to reform entitlements and the tax code. Ryan’s plan is a serious attempt to address our fiscal imbalance over the long term. (Even President Obama has been enthusiastic to describe it as such, probably because he thinks the Medicare cuts in the Roadmap will be politically unpopular.)

While I think the Ryan plan gets most of the big picture questions right about reforming the federal budget, it needs some refinement to be fully workable: particularly, the Tax Policy Center has raised serious questions about whether it will raise as much revenue as it’s supposed to; and even under Ryan’s own revenue projections, the plan would take 40 years to bring the federal budget deficit to a sustainable level.

I do not mean this as a criticism of Ryan; his plan is explicitly a draft that is supposed to be subject to change, and in Washington he’s not exactly competing against a universe of better-refined fiscal plans. His plan will likely serve as the foundation for the conservative argument that a large, permanent expansion of federal revenues is not necessary to achieve fiscal balance. With refinement, it can be even more effective in that role, and one topic I will address here is how it can be refined.

–Josh Barro