Can Obama Make Government Solvent?

Start by reforming Social Security and Medicare.

• By HOLMAN W. JENKINS, JR.

Barack Obama thus far has treated politics mainly as a business of mobilization, not persuasion. That will now have to change. He's had the audacity to inspire more hopes than he can deliver, especially with his new talk of entitlement reform. He might, if he were Pinochet, deliver a giant, non-porky stimulus package, financed by a trillion dollars in borrowing, followed by a monumental fix to Social Security and Medicare to steer the country back toward fiscal solvency.

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Pinochet, though, didn't have to deal with Congress.

Yet our new president's recent and welcome emphasis on "reform" should be more than an afterthought. His urgent goal is to re-energize the private sector, and that means restoring confidence -- when you boil it down, the aim of anything called "reform."

But this is not the 1930s. The banks have not vaporized. Then, arguably, we didn't have enough government, whereas today the situation is conspicuously different. Our long postwar prosperity has left an unsustainable accumulation of government-spawned Rube Goldbergism, Social Security and Medicare most of all.

But what kind of reform? Democrats seldom say exactly, hoping susceptible voters will assume their promised benefits will be funded unto eternity. And yet Mr. Obama's objectives are perfectly amenable to a genuinely reforming approach.

End the tax preference for employer-provided health care. Make it up to workers with an income or payroll tax cut. This one step would move the economy towards consuming health care efficiently and designing insurance policies that actually insure rather than channel the privileged class's health spending through a tax loophole.

The privileged class, exposed to meaningful price tags, would become a force for disciplining cost and quality rather than the opposite. Nothing else would so improve the country's long-term fiscal prospects or do more to lend practicality to Mr. Obama's goal of universal coverage.

Back in 1993, when minds were still fresh, economists left and right recognized that the enormous tax subsidy to third-party payership was the original sin of our health-care woes. The Senate Finance Committee devoted a full set of hearings to just this issue. But it was a fix that lacked the grandiosity of a flow chart showing how government would re-engineer health care from top to bottom. There's a lesson here: Real reform is often deceptively simple, leading naturally to changes in behavior that are more far-reaching than any detailed government prescription could hope to achieve.

Mr. Obama, in his campaign, already has adopted the Bush template for entitlement reform in all but name: Incentivize private savings funded by payroll tax givebacks. Leave it to future presidents to deliver the bad news (which workers already expect) that Social Security and Medicare will increasingly become means-tested supplements to private saving. In the meantime, collect the pro-growth free lunch that will come from replacing a disincentive to work (i.e., the payroll tax) with an incentive.

By the bye, those who think the recent halving of America's 401(k)s proves the unwisdom of such reforms should think again. Today's workers should be so lucky to get a realistic picture of what Social Security and Medicare might pay when they retire. In contrast, their mutual-fund statements are a model of transparent honesty about current expectations of future earnings of American business.

Mr. Obama has been handed an opportunity. He will put the welfare state on a path to solvency or he won't, and we're likely to find out soon. His stimulus spending plans will blow up in his face unless the bond markets (which will be called upon to finance them) are convinced the dollar will remain sound and spending under control.

Sadly, to those from whom much is expected, sometimes not enough is given. FDR can have been a great leader who sought the best for his country, and the '30s still have been a succession of political disasters. Both things can be true. Presidents ride the tiger. Without apparent cognitive dissonance, Mr. Obama already has taken to denouncing Washington's "anything goes" culture while simultaneously outlining plans to borrow perhaps $1 trillion to distribute to anybody and anything that happens to fit the wish list of some Democratic Party constituency group (and a few GOP ones too).

He certainly will meet with a gratifying success in the spending portion of his plan. The revelation will be whether he can deliver anything else.