The budget hysteria that now grips Washington bodes ill for the economy by foreclosing new and badly needed stimulus. Yet the upside is that it also creates a historic opportunity to revamp federal spending in ways that foster greater national equity.
Big reforms are most likely to happen during periods of crisis. Conservatives have famously appreciated this truth with a "starve the beast" strategy that aims to first cut revenues and then use resulting budget crunches to downsize government. That playbook guides them today at both the federal and state level.
Republicans in Congress softened their position on taxes yesterday, when 34 GOP senators voted to repeal tax breaks for the ethanol industry. The proposal, which was added as an amendment to an economic-development bill, failed, but the vote shows that at least some Republican lawmakers are willing to back revenue hikes to cut the deficit.
Do Republican leaders in Congress answer to Tea Party activists or to Wall Street? That question will be answered in the next few weeks as the debt-ceiling fight comes to a head. The choice that GOP leaders make will influence more than fiscal policy or the financial markets; it will also shape the 2012 election and reveal the true identity of today's Republican Party.
The smart money in Washington is betting that Medicaid will suffer the deepest cuts when and if lawmakers strike a deal on deficit reduction. Why? Because it is assumed that Medicaid, which was designed to serve the poor, doesn't have powerful friends in the Capitol. That's just how politics works: The weak get shafted.
But maybe the smart money is wrong. Republicans who think that Medicaid is an easy target may be in for another hard lesson as seniors revolt against -- and Republicans back away from -- the GOP's plan to gut Medicare.
Among the many problems with Paul Ryan's draconian budget plan is the idea that federal spending can and should be capped at 20 percent of GDP.
Let's start with why the "should" part is problematic. Like the president's budget commission, which called for capping spending at 21 percent of GDP, fiscal conservatives make the assumption that terrible things will happen if federal spending goes above some magic point. But where is the evidence that a few percentage points actually makes any difference at all when it comes to economic growth?