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Out of Balance

Obama’s deceptive budget.

Apr 29, 2013, Vol. 18, No. 31 • By JAY COST
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Earlier this month, President Obama released his fiscal year 2014 budget, which calls for $1.1 trillion in higher taxes over the next decade, cuts of $400 billion from Medicare and Medicaid, and alterations to Social Security’s benefit rate worth about $130 billion. 



Initial reviews seemed heartening. Republican senator Lindsey Graham of South Carolina said this could be a step toward a grand bargain: “The president is showing a little bit of leg here, this is somewhat encouraging.” The left wing of the Democratic party, meanwhile, reacted negatively. Arizona Democrat Raúl Grijalva, co-chair of the House Progressive Caucus, called the budget a “nonstarter.” That seemed another promising sign. If the far left of the Democratic party is opposed, how bad can Obama’s offer actually be? 

Unfortunately, on closer inspection, the answer turns out to be: very bad indeed. 

For starters, conservatives should pay no attention to the criticisms from left-wing Democrats, which may merely demonstrate how reactionary the American left has become. Progressives are so enamored of their past political successes in health policy that they refuse any attempts to update entitlement programs for modern times. Medicare may be inefficient and ineffective; it may have been designed at a time when the economy was growing, the workforce was growing, and people died far younger than today; it may crowd out spending on other worthy policy goals; it may be a bonanza for lobbying groups; but it is theirs, and it shall not be touched. 

Unfortunately, the issue of the federal budget deficit, especially over the long term, is poorly understood, even by many journalists and politicians. One reason is that the country actually has two deficit problems. The first is a short-term imbalance between revenues and outlays, due in no small part to the recession of 2008-09, which greatly reduced tax collections while expanding federal spending, especially for programs on automatic pilot, such as food stamps. In theory, this imbalance should end after the economy returns to its full potential. 

The second deficit problem can be summed up in two words: health care. Federal health entitlement spending is growing faster than the economy. This year, the government will spend approximately 5 percent of the nation’s gross domestic product on programs like Medicare, Medicaid, the Children’s Health Insurance Program, and Obamacare. The Congressional Budget Office projects that in 25 years, that figure will exceed 10 percent of GDP. In 50 years it will exceed 15 percent of GDP. Meanwhile, discretionary spending is not contributing to our long-term deficit, as it is expected to drop from 11 percent of GDP this year to a shade under 10 percent in 2038.

Health entitlements are devouring our budget, but Obama does not address this long-term problem. In fact, his “balanced” approach is anything but. Tax revenues cannot be expected to grow much faster than the economy, but health entitlement spending will do precisely that; thus, taxing our way out of this long-term deficit would require gargantuan and ever-increasing tax rates, which would themselves take a terrible toll on economic growth.

Unfortunately, that does not mean the entitlement problem has a simple fix in the form of deeper cuts. The experiences of the 1990s are instructive. When President Bill Clinton and congressional Republicans produced a briefly balanced budget in the late 1990s, they achieved it partly by agreeing on cuts to Medicare reimbursement rates for doctors according to a formula known as the “sustainable growth rate” (SGR). But the SGR was unrealistic. Doctors rebelled, and Congress ever since has been forced to spend billions upon billions on what is known as the “doc fix,” which returns to Medicare the money theoretically taken out in the 1997 budget deal. 

The lesson here is that cuts to entitlement programs are extremely fragile politically. Doctors, hospitals, nurses, senior citizens, and a host of other interest groups are bound to rebel and put enormous pressure on Washington to restore lost funds. Obamacare pretends to cut a little more than $700 billion from Medicare over the next decade, but Richard Foster, the former chief actuary of the Centers for Medicare and Medicaid Services, has expressed doubt that the cuts will ever be carried out. 

Why, then, should Republicans agree to anything that resembles Obama’s budget? His tax hikes cannot cover the fast-growing cost of health entitlements, and his cuts to Medicare providers will be impossible to sustain. Indeed, the president himself gives the game away by back-loading most of his Medicare cuts in the years after he leaves office. 

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