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Budget demagoguery

By PETER MORICI, UPI Outside View Commentator   |   Feb. 15, 2011 at 5:52 AM   |   Comments

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COLLEGE PARK, Md., Feb. 15 (UPI) -- The annual exercise in obfuscation begins -- U.S. President Barack Obama has tabled his 2012 budget and the congressional Republicans are responding. Neither party is serious about cutting spending.

The president's budget document shows a $1.6 trillion deficit for 2011 and serves up new "investments" in education, transportation and research and development, while offering to slice less than $100 billion mostly from domestic discretionary spending.

U.S. House of Representatives Republicans, for their part, are squabbling among themselves about cuts in the same range, as both sides really focus on only 15 percent of the budget -- discretionary spending, excluding security and defense.

Democrats will stubbornly argue the economic recovery will collapse if the deficit is cut by any more than $100 billion and Republicans will offer to privatize Medicaid and Medicare, as if vouchers and private spending accounts will help the nation's poor and elderly obtain lower drug and hospital rates more than can the government.

The Tea Party's denials notwithstanding -- the failure of both sides to offer meaningful proposals to cut federal healthcare spending and Social Security are setting up Americans for a giant tax increase that will kill U.S. competitiveness and damn the nation to European-style slow growth and high unemployment.

In 2007, the year before the recession, with Bush tax cuts in place and wars in Afghanistan and Iraq at full tilt, government spending and the deficit were was 19.6 percent of gross domestic product and $161 billion, respectively. For 2011, with the economy recovered, federal spending's share will exceed 25 percent and the deficit will be nearly 10 times larger.

The Democrats took control of the Congress in 2007 and used the recession as cover to permanently increased spending on the federal entitlements, regulatory bureaucracy and silly industrial policies, like high-speed rail and electric cars. Now the president won't give much of that back and will ultimately seek dramatically higher taxes.

Entitlements -- mostly Social Security, Medicaid, Medicare -- consume about 60 percent of the budget and over the next decade that figure will rise to about 68 percent. Without curbing spending in those areas, there is simply no way out of Washington's fiscal mess.

When Social Security was established, life expectancy was 64 and the retirement age was set at 65, whereas today life expectancy is 78 and the retirement age reaches 67 in 2027 under current law.

With the baby boom retiring, payroll taxes no longer fund benefits and by 2018 payments will exceed those taxes plus interest earned by the trust fund, and start running down the capital. Eventually, the system will be broke, even with higher payroll taxes, under any realistic set of economic growth assumptions.

It is time to get serious. Increase the retirement age to 70 for everyone under age 55. Ten years is plenty to plan for that. Set aside jobs in municipalities -- for example, maintenance positions at the schools or clerking in county offices -- for those individuals over 60 in physically rigorous occupations who can't find alternative work.

The United States spends 19 percent of GDP on healthcare, while Germany with a system of mandatory private insurance -- note the similarity to "ObamaCare" -- spends 12 percent. The United States simply can't afford that competitive disadvantage.

The president's new healthcare law is unlikely to deliver promised cuts in Medicare reimbursements to providers, will likely push U.S. spending to more than 20 percent of GDP and keep the federal deficit in the range of $1.5 trillion .Don't believe Office of Management and Budget deficit projections to the contrary -- those have proven consistently too optimistic.

It is high time for real reform. Limit prices Americans are charged for drugs to what the Germans pay, slice doctors' salaries and overhead paid to hospitals and private health insurance bureaucracies to German levels and implement genuine malpractice reform.

Alas, members of the American Medical Association, pharmaceutical and health executives and tort lawyers contribute generously to campaigns of Donkeys and Elephants alike, making Mules of the rest of us.

Sadly, most Americans are going to wind up paying higher taxes and not getting much for it but more budget troubles, high unemployment and limited futures for their children.

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(Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

© 2011 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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