Budget Danger Ahead

Published July 7, 2011

National Review Online

As the debt-ceiling showdown heads into its final stages, the political maneuvering has intensified, with both sides seeking to gain the upper hand in the public-relations war. Leaders from both parties know the stakes in this fight are very, very high; confrontations of this sort tend to become defining moments in political life, for good or ill. At this stage, anything could still happen, with many scenarios still in play. But for Republicans, there are reasons to worry that this showdown could be headed toward a political and fiscal debacle if they are not very careful.

It wouldn't be the first time Democrats got the better of Republicans in a budget fight. In 1990, Richard Darman, who was director of the Office of Management and Budget, wanted to strike a budget deal to bring projected budget deficits down by $500 billion over five years. As a precondition for entering the talks, however, Democratic Senate majority leader George Mitchell demanded that Pres. George H. W. Bush renege, in writing, on his “no new taxes” pledge. The president did so at Darman's urging, and from that moment on, the president's standing and leverage plummeted. At crucial moments in the ensuing process, the tax increases kept getting larger and more onerous, and the spending cuts and entitlement reforms kept getting more ephemeral. In the end, it was just a question of how bad the political fallout would be for the president, which of course turned out to be very bad indeed.

In the current fight, it's quite clear what President Obama and his allies are trying to accomplish. First, they want a package upon which the president can campaign in 2012. Something on the order of a “$3 trillion deficit-cutting program” (no matter how phony)—or even $2 trillion—would help the president downplay the big-spending, liberal image that most independent voters now have of him.

Second, the president wants to raise taxes without getting blamed for it. Hence the disingenuous cat-and-mouse games aimed at luring Republicans into accepting tax hikes behind closed doors so that the president never actually has to take ownership of them before they become law. Quite a trick if he can get away with it.

Third, and most important, Democrats want a deal that doesn't give an inch on what really matters to their voting base—which is the entitlement status quo. The Democratic party has come to define itself as the party of entitlements. The New Deal. The Great Society. Obamacare. Nothing gets the Democratic heart beating quite like ensnaring the entire American middle class in entitlement dependence. For Democrats, victory means forcing Republicans to accept a budget framework that leaves today's entitlement superstructure—and most especially centralized government management of American health care—exactly as it is today.

To further that goal, the president and his allies are playing a familiar card. It's not that they are against entitlement “reform,” they say, it's just that they want to protect the beneficiaries from any financial sacrifice. And so we learn in recent days (see here and here) that Democrats are willing to put sizeable Medicare and Medicaid “cuts” on the table. Among the changes that are reportedly under consideration are further reductions in what providers of services and products are paid, trims in Medicare's support of hospital-based physician-training programs, and importation of Medicaid's pharmaceutical-rebate scheme into the Medicare prescription-drug benefit for the so-called “dually eligible” (that is, the elderly who are enrolled in both programs). And apparently some Republicans are willing to play along.

These kinds of changes in Medicare and Medicaid are nothing new. Various versions of them have been included in every budget deal going back 30 years, and most especially in the bipartisan deals of 1990 and 1997. They do not constitute genuine entitlement reform. They will not fix Medicare and Medicaid. And they will not solve the nation's budget problem.

Yes, on paper, the Congressional Budget Office will say they save money, perhaps even a lot of money. But CBO has said that every time a budget deal in the past has included similar provisions. As the years go by, the savings always vanish in the regulatory complexity of the programs, and entitlement spending continues to rise just as it always has. Moreover, arbitrary across-the-board payment cuts are actually damaging to the efficient operation of the health system. They lead to cost shifting, and they drive willing suppliers of services out of the marketplace. In the end, price controls do nothing to change the underlying reasons for cost growth.

What's needed is fundamental entitlement reform, and most especially a reform of Medicare and Medicaid that moves away from government micromanagement and toward a market-based system with cost-conscious consumers. Most Republicans understand this, which is why the House passed a budget plan that included far-reaching reforms of the Medicare and Medicaid programs. This is a plan that would actually resolve the nation's fiscal problems—without raising taxes. Which is also why Democrats are apoplectic about it.

In the debt-limit talks, Republicans need to be very wary of confusing meaningless Medicare and Medicaid “cuts” with actual reforms that will make a difference. If the president and his allies have ruled out all variants of genuine reform—and the recent Medicare proposal from Sens. Joe Lieberman (I.) and Tom Coburn (R.) certainly counts as a first step toward genuine reform—then Republicans should make it clear that they have no incentive at all to make concessions.

If that means that a “large” deficit-cutting deal can't be struck on the debt limit, so be it. A $2 trillion or $3 trillion package, heavy on tax hikes and the usual assortment of Medicare and Medicaid regulatory tinkering, should be the Republicans' worst nightmare. It will hand the president a huge political victory, leave the entitlement monolith just as it is, further entrench central government management of the health sector, and burden taxpayers even more.

It would be far better to find a way to cut whatever spending can be cut sensibly with some Democratic support, raise the debt limit modestly, and leave the big questions on entitlement reforms and taxes to the collective judgment of the voting public in 2012.

James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director at the Office of Management and Budget from 2001 to 2004.

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