08/21/2012 02:05 pm ET Updated Oct 21, 2012

Paul Ryan's Two Gifts to the Progressives


Last week, I made the case that Paul Ryan will likely benefit progressives, not conservatives, in the election this November -- in one of two very different ways.

Most likely, he will activate progressives, and give Obama the edge in the election. But if he is smart and strategic, he can calm the fears of the left, and win the votes of the center.

By October 2-3, we will know whether Ryan is a net asset or liability to the Romney campaign. That is when conservative and liberal leaders gather together for a rare joint conference called the "UnConvention."

So far, events have tended to favor my "most likely" scenario. The Republicans have been forced to play defense, not offense, as Romney struggles to defend his running mate's Medicare plan, reassuring voters that cuts will actually "preserve and protect" the system.

Privately, the past week has left Romney strategists worried. By choosing Ryan, they placated major donors and excited the conservative base. But they energized the left even more. Progressives now have a clear demon to target. And swing voters, now about five percent of the electorate, don't yet trust Ryan. The tide has turned, at least for the moment, and it favors Obama.

But Ryan could reverse that, and give the GOP the edge. All he has to do is tell the nation three truths.

Likely, he won't, for reasons I will explain. But first: How could Ryan win over swing voters, and reduce progressive fear and anger, while holding on to his base?

As I wrote last week, Ryan is trusted by conservatives, because he tells their truth. But he is feared by the center and hated by the left, because so far, he also panders to the right's delusions.

Ryan alone can reverse this fear, and undermine the attempts to demonize him. To do so, he needs to explicitly express not just the right's truth, but the left's, and the center's.

The first truth, which plays to his base, is that conservatives are right -- as a nation, we are out of money and deep in debt.

The second truth, which progressives understand, is that liberals are also right -- we can't pay off our debt by extracting it from the poor, the middle class, or the environment.

The third truth, which swing voters and centrists know, is that to meet both our economic and our social obligations, we can't just spend-baby-spend or drill-baby-drill, as the left and right propose. Nor can we force the nation into a right-wing social straightjacket that idealizes the 1950s.

Instead, America needs to create value again. For that to happen, we need to change the way we tax, spend, and grow.

At the UnConvention this October 2-3, conservative leaders George Shultz and David Stockman, and liberal icons Robert F. Kennedy, Jr. and Joan Blades, will join with 800 business and civil society leaders in an unusual collaboration: to reconcile truths that the major parties refuse to acknowledge. (To find out more, click here.)

Conservatives will point out that the federal government's total indebtedness now stands at more than $51.3 trillion, according to the Treasury Department. According to Bruce Bartlett, the national debt makes up a fifth of this -- $10.2 trillion. Veterans and federal employees are owed $5.8 trillion. Social Security's unfunded liability -- promised benefits over expected Social Security revenues -- is $9.2 trillion over the next 75 years. And Medicare's unfunded liability was $24.6 trillion.

But liberals will point out that it would be impossible to cut spending enough for a single generation of Americans to pay off this debt -- it totals nearly the entire net worth of American households. Unless our productivity and output grows, the Treasury projects that within a generation the federal debt will rise to 100 percent of G.D.P., as our future commitments come due, and suddenly become part of the nation's acknowledged debt.

This would be devastating to the nation. Balancing the federal budget would not be nearly enough, as former Reagan budget adviser Bruce Bartlett and other economists argue. The federal government would need to run a surplus continuously for 75 years to prevent the debt/GDP ratio from rising.

If we can't cut spending enough to erase the deficit, what can we do? The right's knee-jerk instinct has been to consume more fossil fuel energy, like we did in the 1950s and 1960s. But that path is well worn. It has been about 40 years since the first global energy crisis in 1973. Since that time, rather than innovating beyond our dependence on fossil fuels, we have sacrifice $7 trillion in growth, and transferred over $1.2 trillion to nations that are either unstable or antithetical to our interests. Those dollars financed the Baathist terrorists under Saddam Hussein in Iraq; the radical Mullahs under the Ayatollah in Iran, and of course Al Qaeda, with its roots in Saudi Arabia.

The other rightwing panacea is to drill-baby-drill our way out of debt -- to embark on massive and permanently increasing extraction of fossil fuels, all from within our borders. To intellectually clear the way, advocates of this path simply define political, military and environmental realities out of existence.

But even with large natural gas and oil sands holdings in North America, we have no reasonable chance of producing our way to energy independence. Natural gas could well replace coal as the dominant fuel for generating electricity, but it won't replace enough petroleum as a transportation fuel. Saudi Arabia and other Middle Eastern regimes control 66 percent of global oil reserves. Their cost of production is a fraction of that in the Americas. Because oil is a global commodity, the Saudi's can always out-produce the U.S., and undercut us in price.

The reality that neither the left nor right want to face is this: We can't spend or drill our way to prosperity. We can't live off subsidies -- from tax breaks to wars -- forever. Eventually, someone in America has to create real value. But who? And how?

In February 2011, in a stark report entitled Growth and Renewal in the United States, the respected McKinsey Global Institute concluded that if the U.S. cannot significantly boost productivity growth rates by a third, the consequences will be painful, and far more damaging to U.S. prosperity than a double-dip into the Great Recession. "More than ever, the United States needs productivity gains to drive growth and competitiveness," the McKinsey team wrote.

Labor productivity gains alone are not enough, McKinsey wrote. It is important that the United States return to the "broadly-based productivity growth of the 1990s when strong demand and a shift to products with a higher value per unit helped to create jobs even as productivity was growing."

In short, the U.S. needs to begin to replicate last century's 14-fold leap in productivity. But this time, productivity gains must be more than labor alone. Even more important is a gain in other productivity factors, especially energy.

McKinsey offers good news as well. "There is an opportunity to achieve a resource productivity revolution comparable with the progress made on labor productivity during the 20th century," its team wrote in their November, 2011 study, Resource Revolution. The combination of the microchip, computers, the Internet, advanced materials, advanced recycling, renewable energy, clean technologies and other innovations on the horizon can increase the amount of wealth we create per unit of energy by more than tenfold by the end of this century.

A handful of resource productivity innovations could meet 30 percent of the world's total resource needs in 2030, according to McKinsey. That could reduce projected demand for oil from 103 million barrels a day to as little as 76 million, and cut carbon emissions half‐way to the level many scientists believe is needed to minimize global climate change.

In the process, "digital energy" -- the energy freed up when technologies from Cisco, Google, Hewlett Packard, Intel, and thousands of start-ups drive productivity leaps -- could turn out to be the cheapest energy of all, and displace Saudi Arabia's hegemony over the world's primary energy supply. If the past fifty years of economic and energy data hold, the U.S. could shift away from fossil fuel intensity at a rate of 3 to 5 percent a year, possibly more.

Mainstream conservatives and liberals could both support that. At a 3 percent annual pace, we could quadruple energy productivity, and drive down carbon intensity 75 percent, all by 2060. That means more jobs, more prosperity, less war, and less pollution.

To get there, McKinsey's formula is basically two-fold: First, stop taxing prosperity. Second, stop subsidizing pollution.

The idea isn't new. In fact, it's one of the most popular ideas never considered by Congress. It's never considered because it runs counter to the way Congress operates. Rather than feeding the troughs of special interests on both the right and left - and winning political and financial support - it begins to empty both those troughs at the same time. That's good for America as a whole, but not for a host of special interests.

The list of conservative economists who support the basic concept is long. Luigi Zingales, the University of Chicago economist whose Tea Party following is wide and deep, wants to eliminate the income tax, and replace it with approaches that favor innovation, such as taxes on poverty, inheritance, and carbon.

Dale Jorgenson, the Harvard economist who has best documented the extraordinary contributions of information technology to U.S. growth, has proposed that we abolish federal payroll and income taxes, in favor of taxes on consumption, pollution,
and inefficiency.

Free market conservative Tyler Cowen, economics professor at George Mason University and one of the nation's leading scholars on how societies become prosperous, calls a tax shift an idea "that voters need to hear: Phase out all forms of capital income taxation, including the corporate income tax, and replace them with a carbon tax, including a gasoline tax."

Here are five key components of a pro-innovation tax and energy system, built not on the cycle of tax-and-spend, but on smart tax reform that is fiscally conservative, and socially and environmentally progressive.

First, Set a National Innovation Goal: to increase the productivity of energy by 3-5 percent, every year, for 50 years.

Second, Stop Taxing Jobs and Prosperity.
Cut payroll and income tax rates for individuals and corporations.

Third, Develop the Next Energy Economy.
Yes, harness abundant natural gas and oil sands, under smart regulations that prevent damage to water, air, and climate. But above all, tap the much greater stores of digital energy, the energy freed up by efficiency gains from the information and communications sectors.

Fourth, Tax Pollution, Not Prosperity.
Put a price on fossil fuel pollution, set at the rate that will drive the 3-5 percent annual productivity gain.

Fifth, Use Border Adjustments to Cut Taxes More. Apply the pollution tax to imported goods -- including oil imports -- so we don't inadvertently subsidize China, Venezuela, or Iran. Use 100 percent of the proceeds to cut other taxes.

Even anti-tax crusader Grover Norquist supports the concept of tax shifting. But he has one legitimate worry. Rather than just shifting taxes, he asks: Won't politicians just try to increase them?

The answer is: of course they will try. That is why taxes should be shifted from things that naturally increase over time, like income and prosperity, to those that reliably decrease over time, like consumption and pollution rates. The Highway Trust Fund provides an example. Because it is funded with gas taxes, tax rates constantly go down, as fuel efficiency increases. Politicians can't rely on automatic tax increases. If they want more revenues, they have to go on the record and vote for them.

There is a right wing Achilles heel in this plan. Carbon could be in the market basket of pollutants taxed. That idea makes some conservatives spontaneously convulse. It violates the dogma that carbon can't possibly be a pollutant.

But behind the scenes, most thoughtful conservatives know it is. They simply don't believe the disaster scenarios put forth by those they consider climate extremists. To them, a tax shift to carbon is a "no regrets" policy: If climate change is real, the shift could save the planet as well as the economy. If it isn't, then a shift will only save the economy.

Bill Shireman is President and CEO of Future 500, a non-profit that builds alliances between business and civic leaders on the right and the left. Future 500 and CR Magazine will jointly convene the Commit! UnConvention this October 2-3, in New York City.