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The Obama Budget - Inadequate, But an Opportunity

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65 days past its required submission date, the Obama administration finally sent its 2014 budget up to Capitol Hill this past week. For those who worry about the debt we are leaving to our children, POTUS’ budget offered cold comfort.

The Administration’s narrative on the budget speaks in the language of compromise, but it is hard to find that in the details.

The President’s budget spends more than the Republican budget approved in the House, which might have been assumed, philosophically. But it also spends more than the much more expansive budget passed by the Democratic-controlled Senate. Indeed, for all the talk of budget cutting, 2014 fiscal plan has $160 billion more in spending and a $128 billion increase in the deficit, than in the current year – which the Administration purports to be cutting.

But the true sin is in the longer term consequences. As Robert Samuelson points out, the trend lines are clear. From 2014-2023, the Administration projects annual spending on Social Security to rise from $860 billion to $1.4 trillioin. Over the same years, annual Medicare and Medicaid spending would go from $828 billion to $1.4 trillion. Meanwhile, defense and non-defense discretionary spending - everything from meat inspectors and the FBI to the weather service – would barely grow.

As Samuelson points out, these are all “nominal dollars” that don’t take inflation into account. When the figures are adjusted for inflation and population, the results are alarming. Medicare and Medicaid rise by 27 percent. Social Security by 25 percent. Defense and non-defense discretionary spending decline by 22 percent.

In 2012, defense and domestic discretionary programs represented 8.3 percent of US GDP. By 2023, the Administration projects their share at a mere 4.9 percent.

“This can’t continue indefinitely, because, at some point, these programs become completely ineffective or disappear,” Samuelson says.

Indeed, the Administration’s 10-year budget window projects spending of $46.5 trillion – with total deficit reduction of only $6oo billion. And this minuscule savings is solely the result of tax increases. Spending cuts in the budget – such as they are – get spent elsewhere in a game of budgetary Three Card Monty.

Instead of a compromise, POTUS’s budget is a status quo document.

The President and Democrats remain unwilling to cope with basic questions posed by an aging population, high healthcare costs and persistently high deficits. For instance, what shouldn’t programs for the elderly be overhauled to reflect longer life expectancy and significant wealth among retirees? Is an honest debate about the size of government off the table (as the hysteria surrounding the sequester would suggest), even as a plethora of commissions and studies have concluded that low value and duplicative programs can save real money?

This is the existential problem we face as a nation.

It is true that that the President has officially put entitlement spending on the table (to the fresh hysteria of the left), but the impact is barely noticeable compared to the size of the problem.

The new inflation calculation for Social Security – “chained CPI – would save $130 billion over a decade, where Social Security spending is estimated at $11.2 trillion over the same period – a little more than one percent. A proposal to raise Medicare premiums for affluent retirees is marginally more meaningful, but would only affect couples with incomes exceed $170,000; the top 5 percent.

As for government waste, despite all the rhetoric from the Administration, the proposed budget has $25 billion as a result of cuts, consolidations and savings. Not one major duplicative program is eliminated.

So, what are we to do?

Republicans in the House hold the key to the budget debate, and they have two very stark choices.

First, they can simply say no, and insist that their budget blueprint be implemented in total or not at all. Despite the soundness of Paul Ryan’s approach, the practical reality is that the House budget stands no chance of passing in the Senate, and if some miracle were to be approved, it has even less of getting President Obama’s signature. That will result in a continued, broken budget process, short-term spending bills, omnibus appropriations, confusion, program uncertainty and continued political clashes that will directly impact the economy. The debt ceiling debate is laying in wait out there, ready to rear its head this summer.

Or second, the GOP can cut a deal.

Republicans in the House can look at ominous future sketched out in the most optimistic assumptions of the White House, and choose to do nothing, or they can take a first step to staunch the fiscal bleeding, understanding that there are five election cycles between now and 2023, where modifications can be made, as no new Congress is bound by the previous one.

The Administration’s entitlement reforms are anything but robust, but they are a concrete start. The President has put them on the table – something that the GOP has hectored the Administration about since the budget battles of 2011.

Let’s negotiate a more consequential entitlement reform package. Pocket POTUS’ proposals for chained CPI and increased Medicare premiums for wealthy retirees. To that, add a formula for raising the retirement age for Social Security and Medicare, and gradually introduce means-testing for both Social Security and Medicare.

On the President’s demand for increased revenue in return for entitlement changes, split the difference. Agreement that the tax code is in dire and fundamental need of reform crosses party lines. At 3,800 pages, last updated in the 1980s, the code is neither fair or constructive. And it includes over $1 trillion in tax expenditures – essentially federal spending masquerading as tax preferences and carve outs, that distort the market.

Put together the best, politically feasible deal that eliminates or reduces the greatest number of tax loopholes. Divide that new revenue into two parts. Half is applied to lower tax rates across the board. The other half is earmarked specifically for deficit reduction – an updated version of Al Gore’s lockbox.

While unpalatable to the GOP, this is infinitely easier than raising tax rates, as they had to do in January. Tax reform based on eliminating or reducing tax expenditures is a method of spending cuts achieved a different way. While the GOP would obviously want all the savings from reform to go to tax relief, agreeing to earmark funds for specific deficit reduction meets a key agenda item for Republicans.

If this can be tied to a slower growth in government spending overall, the outlines of a deal become real.

Republicans who consider “dynamic scoring” on the budget (including the behavioral implications of government policy in estimated fiscal outcomes) seem hopelessly statist in understanding and mastering political forces and realities.

The GOP will again be given an opportunity to make its case to the American people in 2014 and 2016. That case must be more than a hypothetical construction of economic perfection. It must be a governing vision whose roots are embedded in today’s legislation – and yes – today’s deals. Proof that the party is constructive and above all, can be trusted.

Ronald Reagan famously said that if given a choice, he would take part of a loaf and come back for the rest later, rather than jumping off the cliff with the flags flying – a dramatic but otherwise futile gesture. Republicans should remember.

As every election cycle has proven to newly elected leaders, the American people will only go where they want to go, and not necessarily where politicians believe that path leads.

President Obama badly overestimated his mandate in 2008 which led to the GOP routes of 2009 and 2010. The budget crises of 2011-12 played a role in tarnishing the GOP brand as a Party of rich, out of touch elitists, worried only about the wealthy, at the expense of everyone else. The American people, faced with two unpalatable courses of action in ’12, opted for the safety of the status quo, as neither party made an effective case for majority governance.

Elections in ’14 and ’16 will offer the Republicans a road to validate their governance potential with something greater than “no.” Compromise is not surrender. Compromise and principle are not mutually exclusive. Done smartly, the seeds of compromise today can lead to a conservative renaissance later in this decade, that will truly tackle the existential problems that threaten our very solvency.

The hard word begins now. It is a long hard slog ahead. The GOP needs to be the tortoise, not the hare.

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