Quick Reaction to the President’s Speech

by Reihan Salam

When President Obama addresses the nation, he isn’t just addressing the small minority of Americans who are policy-obsessed news junkies. Rather, he is trying to introduce a much larger audience to a lot of unfamiliar ideas, some of which might be counterintuitive. I can’t say I’m a fan of how this president has governed the country, but I’m trying to be as fair I can. After all, he has an extremely difficult job. So I will single out this part of his speech at George Washington University for praise:


Most of us, regardless of party affiliation, believe that we should have a strong military and a strong defense.  Most Americans believe we should invest in education and medical research.  Most Americans think we should protect commitments like Social Security and Medicare.  And without even looking at a poll, my finely honed political skills tell me that almost no one believes they should be paying higher taxes. 

Because all this spending is popular with both Republicans and Democrats alike, and because nobody wants to pay higher taxes, politicians are often eager to feed the impression that solving the problem is just a matter of eliminating waste and abuse –that tackling the deficit issue won’t require tough choices.  Or they suggest that we can somehow close our entire deficit by eliminating things like foreign aid, even though foreign aid makes up about 1% of our entire budget. 

So here’s the truth.  Around two-thirds of our budget is spent on Medicare, Medicaid, Social Security, and national security.  Programs like unemployment insurance, student loans, veterans’ benefits, and tax credits for working families take up another 20%.  What’s left, after interest on the debt, is just 12 percent for everything else. That’s 12 percent for all of our other national priorities like education and clean energy; medical research and transportation; food safety and keeping our air and water clean.

Up until now, the cuts proposed by a lot of folks in Washington have focused almost exclusively on that 12%.  But cuts to that 12% alone won’t solve the problem.  So any serious plan to tackle our deficit will require us to put everything on the table, and take on excess spending wherever it exists in the budget.  A serious plan doesn’t require us to balance our budget overnight – in fact, economists think that with the economy just starting to grow again, we will need a phased-in approach – but it does require tough decisions and support from leaders in both parties.  And above all, it will require us to choose a vision of the America we want to see five and ten and twenty years down the road. 

This is a fairly sober and accurate description of reality. Not so bad. The next part of the speech, however, represented a significant reversal. Having implicitly criticized those who talk only of cuts to discretionary spending or who pretend as though eliminating waste and abuse is enough, he then lays into conservatives for calling for a serious effort to rein in entitlement spending. And he uses extremely polemical language and selective and misleading examples. Others will explain the way in which the president has misrepresented the kinds of public investment that we’ve seen in Korea and Brazil, and others will explain that the undisciplined spending of taxpayer dollars isn’t the only way to educate our young or to build high-quality infrastructure. I don’t think that the president is trying to be dishonest. It’s entirely possible that he really believes that private entrepreneurs can’t bring effective instructional methods to scale, or that massive cost overruns in infrastructure don’t reflect a perverse misalignment of incentives that even more spending can’t fix. So I’ll bracket all of that.

What did the president actually propose?

The first step in our approach is to keep annual domestic spending low by building on the savings that both parties agreed to last week – a step that will save us about $750 billion over twelve years.  We will make the tough cuts necessary to achieve these savings, including in programs I care about, but I will not sacrifice the core investments we need to grow and create jobs.  We’ll invest in medical research and clean energy technology.  We’ll invest in new roads and airports and broadband access.  We will invest in education and job training.  We will do what we need to compete and we will win the future.   

The president didn’t name a single programs that he cares about but that he will nevertheless cut, even for illustrative purposes. Rather, he named a series of policy domains in which he intends to increase spending. This seems more like a reflection of the political problem he described earlier on than like a serious effort to reckon with it. 

The second step in our approach is to find additional savings in our defense budget.  As Commander-in-Chief, I have no greater responsibility than protecting our national security, and I will never accept cuts that compromise our ability to defend our homeland or America’s interests around the world.  But as the Chairman of the Joint Chiefs, Admiral Mullen, has said, the greatest long-term threat to America’s national security is America’s debt.

I endorse this wholeheartedly, though I imagine many of my colleagues will disagree.


The third step in our approach is to further reduce health care spending in our budget.  Here, the difference with the House Republican plan could not be clearer:  their plan lowers the government’s health care bills by asking seniors and poor families to pay them instead.  Our approach lowers the government’s health care bills by reducing the cost of health care itself. 

What the president might not understand is that asking seniors and all families (the PTP takes into account differences in income and health status in Medicare; Medicaid block grants ask taxpayers at the state level to take more responsibility for poor families, i.e., to devolve decision-making with the understanding that case management is best handled close to the ground) to pay more is designed to address the underlying cost structure of medical care. Jason Furman, one of the president’s advisors, has written intelligently on this score. Though I’m sure Furman emphatically rejects the PTP, he has written the following:

Americans are frustrated with the unaffordability of health insurance, the effectiveness of health care, and the rising number of uninsured. One important contribution to all of these challenges is the increased insulation of Americans from the cost of their care. In 1965, roughly half of health-care expenses were paid out of pocket by patients; by 2006, that figure had declined to just 13 percent—lower than the average of other high-income OECD countries.

Like Furman, I tend to think that the poorest families should be insulated from cost-sharing, but that increasing cost-sharing could yield significant premium savings that would balance a modest increase in risk. Back to the president:

Already, the reforms we passed in the health care law will reduce our deficit by $1 trillion.  My approach would build on these reforms.  We will reduce wasteful subsidies and erroneous payments.  We will cut spending on prescription drugs by using Medicare’s purchasing power to drive greater efficiency and speed generic brands of medicine onto the market.  We will work with governors of both parties to demand more efficiency and accountability from Medicaid.  We will change the way we pay for health care – not by procedure or the number of days spent in a hospital, but with new incentives for doctors and hospitals to prevent injuries and improve results.  And we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all the evidence and recommend the best ways to reduce unnecessary spending while protecting access to the services seniors need.  

I don’t have a huge problem with IPAB. But I’m struck by critics who see limited defined contributions to the purchase of insurance, i.e., encouraging cost-consciousness as a means of spurring productivity improvements among providers, as a “hand-wave” at the problem of cost structure while “let’s leave it to IPAB” is not a hand-wave. 

Then the president discussed tax expenditures, a subject I’ll address in my next post.