Home >> United States & Canada >> Economics & Trade

     Email   Print 

Getting Serious about Reducing the Federal Deficit: President’s Budget Speech Offers Little to Cheer

Prof. Peter Morici - 4/14/2011

President Obama’s plan to balance the budget was a brilliant political speech—highlighting weakness in the Republican deficit reduction proposal drafted by Congressman Paul Ryan—but it offered little new or encouraging that would correct Washington’s troubled finances.

Once again, President Obama blamed President Bush for the mess—citing two wars and tax cuts that were not funded—when his own political party is more culpable.

In 2007, the last year before the financial crisis and former Speaker Nancy Pelosi and the Democrats took control of Congress, the deficit was a quite manageable $161 billion. Over the next four years, spending has increased $1.1 trillion and the deficit jumped to $1.6 trillion.

The President’s February budget projected the deficit would fall to $772 billion by 2022. However, that forecast is dubious, because it assumes 4 percent growth over the next four years, which few economists would endorse, and cuts in Medicare payments to physicians and hospitals few political observers believe will materialize. More likely, deficits will exceed $1 trillion, or even $1.5 trillion for the next decade, without further action.

In his speech the President claimed to be tabling $4 trillion in additional cuts over twelve years, but there was little new from his February budget.

Mr. Obama proposed higher taxes on families earning more than $200,000 a year. While that may be good populist politics, those tax increases were already in his February budget, and presenting those as additional deficit reduction is deception not worthy of his high office.

As he suggested, some loopholes could be plugged in the corporate taxes; however, moderate Democrats and Republicans agree U.S. corporate taxes are too high for American companies to be competitive. Most revenue that might be found fixing abuses will eventually have to be put into lower corporate taxes for those firms bearing an unfair share of the burden.

Central to the fiscal mess are the rapidly growing bills for Medicaid and Medicare, and Social Security. The president suggested using huge Medicare purchases to negotiate lower drug prices, but he offered no specifics about how that is to be done.

For the rest of health care spending, he again asserted the regulatory panels and boards established by 2010 health care reform law would cut costs; but the jump in 2011 health insurance premiums reveals those measures are ineffective.

Federal and state governments pay 55 cents of every dollar Americans spend on health care, and government reimbursements, not a private market, determine most prices for health services.

Germany and Holland, like the United States, have systems of private insurers, and government reimbursements pay nearly 80 percent of health care costs. Yet, in those countries health care costs are about half the nearly $8,000 America spends for each citizen, because the German and Dutch governments do a better job of regulating prices.

Neither the President nor Congressional Republicans have explained how they are going to improve on subpar U.S. regulatory performance and significantly lower prices for health care services. Until they do, it hard to take either party’s deficit reduction plans seriously.

The Republican plan—Congressman Paul Ryan’s Path to Prosperity—would replace federal Medicaid with block grants to the states and Medicare with vouchers to seniors to buy private insurance; but those tactics, as the President correctly asserts, would merely shift the problem of paying too much for health care services onto the backs of the poor and elderly.

On Social Security, the basic problems are that Americans are living much longer and retiring long before their health requires, and the ratio of retirees to working age Americans is too high and rising. Simply, the retirement age should be raised to 70 for Americans under the age of 55, and neither the President nor Congressional Republicans want to take the political heat for telling Americans the hard truth.

When Democrats and Republicans are willing to start seriously regulating prices for health services, and embrace a substantial and immediate increase in the retirement age, Americans will know they are serious.

Until then, the political speeches will continue and investors should conclude that U.S. Treasury securities are a risky long-term investment. It’s high time Standard & Poor’s and other agencies downgraded the federal governments’ AAA bond rating.

And so, President Obama and Congressional Republicans are tabling proposals to balance the budget, and Americans have a right to be skeptical.

Since 2007, spending has increased $1.1 trillion and the deficit has jumped from $161 billion to $1.6 trillion. The President’s February budget projects the deficit will fall to $772 billion by 2022. However, that forecast is dubious, because it assumes 4 percent growth over the next four years, which few economists would endorse, and cuts in Medicare payments to physicians and hospitals, few political observers believe will materialize. More likely, deficits will exceed $1 trillion, or even $1.5 trillion, for many years to come.

The President will propose higher taxes on the wealthy and plugging some corporate tax loopholes but that simply won’t do it. His budget already assumes repeal of the Bush tax cuts for those earning over $250,000. Even raising income taxes by 50 percent on all families earning more than $200,000 would not yield much more than $250 billion a year. The resulting capital flight would reduce taxable income, and job losses would drive up federal social spending—net deficit reduction would not be large.

Although some loopholes could be plugged, moderate Democrats and Republicans agree U.S. corporate taxes are too high for American companies to be competitive. Most revenue that might be found fixing abuses will eventually have to be put into lower corporate taxes for those firms bearing more than their fair share of the burden.

At the core of the fiscal mess are the rapidly growing bills for Medicaid and Medicare, and Social Security.

On health care, the fundamental problem is that federal and state governments pay 55 cents of every dollar spent on health care. A private market for health care no longer exists, and government reimbursements set most prices for health care services.

Germany and Holland, like the United States, have systems of private insurers. In those countries, although government reimbursements account for nearly 80 percent of payments, health care costs are half of what Americans pay.

Those governments keep costs down by better regulating prices, but in the United States drug manufacturers, health insurance companies and hospitals each have enough influence with the Congress or the President to keep real reform from happening.

A solution requires significantly lower prices for drugs and many health care services, and the President’s health care law doesn’t provide for those—witness the jump in cost of drugs, health insurance premiums and the like in 2011. Now the President is boxed in by past actions to defend a policy that adds additional subsidies to a broken system and increases the deficit.

The Republican plan—Congressman Tim Ryan’s Path to Prosperity—would replace federal Medicaid with block grants to the states and Medicare with vouchers to seniors to buy private insurance, but those tactics would merely shift the problem of paying too much for health care services onto state budgets and the backs of the elderly.

Also, Europeans don’t have the additional burden of abusive malpractice suits but tort lawyers have among their ranks too many prominent contributors to the Democratic Party for any solution to be possible there.

On Social Security, the basic problems are that Americans are living much longer and retiring long before their health requires, and the ratio of retirees to working age Americans is too high and rising. Higher taxes would cripple U.S. international competitiveness with rising Asian economies, and individual retirement accounts risk leaving many elderly without adequate support, especially if they live past 75.

Simply, the retirement age needs to be raised to 70 for Americans under the age of 55. Only that solves the problem and other solutions are unworkable.

When Democrats and Republicans are willing to start seriously regulating prices for health services, and embrace a substantial and immediate increase in the retirement age, Americans will know they are serious. Until then, it would be great drama but for the fact we are saddling our children with an unbearable debt.