The mainstream media has been mesmerized by Washington’s struggle to keep the federal government operating while adjudicating the competing objectives of reality-based conservatives and Democrats in denial. Will the next stopgap funding bill cut $6 billion? $8 billion? $61 billion? Will it last two weeks? three weeks? until September 30? But the really important debate — the debate over America’s future — begins with the House budget. A real budget must contain entitlement reform and the right entitlement reform, to reclaim the promise of America’s prosperity and freedoms.
America is barreling toward disaster. The Congressional Budget Office (CBO) just released its analysis of the latest Obama “budget”: It is nothing but bad news. Over the next ten years, deficits exceed 4.1 percent of Gross Domestic Product (GDP) every year, debt in the hands of the public doubles, and the debt-to-GDP ratio rises above 87 percent. Net interest climbs to almost 20 percent of revenues — even with large tax increases — in 2020. The result: The U.S. faces having its debt downgraded beginning in 2018.
The president’s own fiscal commission described it as a “moment of truth.” Without a change in course, the best-case scenario is that the U.S. somehow maintains access to capital markets but high interest rates and crowding out mean years of stagnation and economic diminution. The worst-case scenario: American’s experience during the 2008 financial crisis will seem mild by comparison with what’s to come.
At the heart of the problem of exploding debt is a spending problem. Who will grapple with this threat? Not the White House, which has steadfastly shirked budgetary leadership. Not congressional Democrats, who toggle between electoral fear and daydreams of expanding the welfare state.
Real leadership has been defaulted to Republicans. But even among the minority willing to lead American’s to a stronger future, a debate remains. In one camp are pure budget cutters, whose distaste for the Obama era leads them to seek a balanced budget, at least by the end of ten years.
That’s a commendable goal that should be admired and applauded. But the leading strategies to get there are either very simple — just slow the growth of total spending — or very mechanical — just cut a fixed percentage every year.
Closer scrutiny of the size of our deficits, the structure of current programs, and demographics suggests that balancing the budget in the near term will be implausible, if not impossible. Net interest is projected to grow four-fold. A budgeter just can’t wish away that expense.
The demography is stacked against balance. People age one year every year. As a result, Social Security and Medicare have nearly 80 million baby boomers just beginning their march through the system. CBO’s deficit projections assume roughly $500 billion in Obamacare Medicare reductions and don’t include a Medicare doctor-payment fix. Obamacare also loaded huge burdens on an already broken Medicaid system.
That’s the starting point. It will not be possible to cut more out of Medicare, unless one is willing to hit current beneficiaries with large reductions. Presumably there is even less appetite for immediately cutting Social Security. To make matters harder, some in the conservative community don’t want to cut defense (and, even if they do, defense spending isn’t what’s driving the long-term deficit problem). And I doubt I will hear many Republicans talking about raising taxes.
The upshot is that it will be very hard to mechanically cut spending in a simple and across-the-board fashion. And if one did, the underlying demography would not change, health-care programs would not change, and thus deficit pressures would not change.
The irony for budget cutters is that by emphasizing a balanced budget, they run the risk of preserving deficits in the long run, thus exposing Americans to future tax increases. Worse, by simply starving the budget, they do nothing to tear out the underlying architecture of a welfare state that will return to bloat in a budgetary heartbeat.
Without structural reforms, the welfare state wins and conservatives can content themselves with a future of debating the most efficient way to raise taxes.
The second camp in the budget debate sees the need to undertake now the needed reforms to Social Security, Medicare, Medicaid, and Obamacare. In reverse order, one can get some substantial budgetary savings by repealing Obamacare and providing states’ block grants for Medicaid (even ones that rise with inflation and population). Both would also raise the quality of health care for their targeted populations, so it’s a win-win.
Structural reforms to Medicare ultimately lead to a defined-contribution system like so-called premium support (again, with indexing for inflation and adjustments for medical risk). Similarly, putting Social Security on a sustainable path is not hard and can improve the program. Both these reforms yield little in the near term, making them less attractive to the budget cutters. But they are essential elements of long-run success.
That is the debate: A shorter-term focus that does not solve the debt problem for the long-term and leaves the welfare state intact versus a reform strategy that does not balance the budget as quickly but permits it to be kept balanced by radically downsizing long-term programs.
The debate between budget cutters and reformers is the debate over America’s future. Reformers should win the day; they have good policy, and they are consistent with the demand for a return to small, efficient government that was voiced in the November elections, and that makes it good politics, too.
Reformers should win. But watch closely. Washington is not very good at making sure that what should happen is what does happen.
— Douglas Holtz-Eakin is president of the American Action Forum.