Larry Kudlow

There are a lot of pieces to the debt-ceiling deal. There are the taxes upon taxes, as the Wall Street Journal editors describe it. That’s the roughly $1 trillion in new Obama taxes on top of what he’s already signed into law. It’s an economy and jobs killer.

Then there’s the entitlement piece, which may be more interesting since Obama is apparently open to extending the Social Security and Medicare retirement age and using the so-called chained-CPI, which would lower cost-of-living adjustments (and increase income-tax thresholds). Whether the president is serious about these entitlement measures, no one knows.  It’s noteworthy that he’s at least talking about them, although he’s linking them to higher taxes.

But there’s another piece to the debt-ceiling deal that hasn’t yet seen the light of day. It’s the non-entitlement spending piece. That is, domestic and defense discretionary spending plus so-called small entitlements like food stamps, unemployment benefits, and so forth.

Here’s my thought: The public wants deep spending cuts. That’s their first priority and that’s why polls overwhelmingly show opposition to a debt-ceiling increase. So regarding those spending cuts, the only thing that matters is the first-year spending decline. That would be 2012. If the spending baseline is brought down significantly in year one, then the out-years will follow suit. The government’s cost curve will ease down.

For example, go back to the Paul Ryan budget. Rep. Ryan includes a $110 billion reduction from the CBO baseline for fiscal year 2012, which reflects a $179 billion cut from the president’s budget baseline. Over ten years, that’s roughly $6 trillion in savings. That would be real money. It would be significant. In fact, Ryan’s total budget in 2012 would actually come in about $100 billion below 2011. That’s incredible. It’s almost always that so-called spending cuts are mere reductions in growth. Hats off to Ryan.

But even so, his ten-year budget would still rise by about $40 trillion.

So, again, 2012 is the only year that really counts for spending cuts in the debt deal. My guess is that any entitlement reduction will take decades. So if Speaker Boehner sticks to his argument that there must be more than $1 worth of spending cuts to offset a $1 increase in the debt ceiling, then 2012 must be his target year.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.