Published February 19, 2009
The contention that these programs, once started or expanded, will revert back to their previous levels of activity, or even disappear altogether when circumstances warrant, runs counter to all experience and common sense. Program enrollees, local school boards, health researchers, university administrators, IT firms, transportation-construction companies, and countless new government contractors and employees will soon be ready to argue that disaster awaits any attempt to return government to its pre-stimulus size.
Consequently, the bill President Obama signed this week will cost much more than the advertised $800 billion. Funding for its health, education, and labor programs alone will add at least $100 billion per year to the permanent federal budget, or some $900 billion more over ten years than the official cost estimate from the Congressional Budget Office (CBO).
Now, having succeeded in getting through Congress the largest unfinanced expansion of government since the 1960s over the near-universal objection of Republicans, President Obama says it’s time for the two parties to sit down together and get serious about “fiscal responsibility.”
Our fiscal problems are not entirely stimulus-induced, though. Even if the economy were performing well, we would be facing deficits in the highly problematic range of 5 to 6 percent of GDP, assuming continuation of President Bush’s tax policies and ongoing engagement in Iraq and Afghanistan. A fiscal correction was going to be needed no matter what. But the “stimulus” bill has unquestionably made matters worse by adding large amounts of unnecessary spending to the budget just as the country is about to take on the costs of the baby-boom retirement.
Between 2007 and 2020, the population aged 65 and older is expected to increase from 38 million to 54 million people. By 2030, federal spending on Social Security and Medicare alone will reach 11.7 percent of GDP under current law, up from 7 percent today. That jump — 4.7 percent of GDP — is more than the entire 2009 budget for national defense.
The official agenda for the coming “summit” has not been released, nor has a list of invitees, but Obama has been signaling for weeks now that he plans to launch a bipartisan effort to address the nation’s “mid-term and long-term” fiscal problems.
Certainly, nothing is more important for the future prosperity of the country than genuine, lasting entitlement reform. But is there any reason to believe Obama will support reforms with bipartisan appeal?
It is worth remembering that Obama already has a Social Security plan. During the 2008 campaign he opposed raising the retirement age and all but said he would oppose benefit reductions, too. Instead, he favors closing the program’s financing gap with a two- to four-percentage-point increase in the payroll tax for households with incomes exceeding $250,000 per year (the current tax rate is 12.4 percent). That would effectively break the historic link between contributions and benefits and turn FDR’s earned entitlement into another welfare program. Not exactly an approach with bipartisan potential.
Then there is health care. Republicans would like to introduce competitive forces into the entitlement programs to slow cost escalation. That’s how the new Medicare drug benefit was designed, and costs for it are coming in 40 percent below forecasts. But congressional Democrats have never shown an interest in structural reform of health entitlement programs; they want to keep them just as they are and use price controls and heavier regulation to cut costs, instead of consumer choice. As a candidate, Obama left no doubt about which side he was on. He endorsed the same old command-and-control methods: cutting payment rates to private insurers that participate in Medicare and using government “negotiations” to set drug prices. There’s no evidence to suggest his views have changed since the inauguration.
But even if Obama is genuinely open to bipartisan ideas on entitlement reform, it is not clear that he could bring a lot of Democratic votes with him, especially in the House, where the prevailing sentiment is to increase health and welfare spending. One of the first bills passed by Congress this year was a major expansion of the State Children’s Health Insurance Program (SCHIP), opening up the program to families with incomes as high as $80,000 per year. CBO has estimated that this new law will increase entitlement costs by $115 billion over ten years and the federal budget deficit by nearly $42 billion over that period. And if the House had gotten its way, the stimulus bill would have opened up Medicaid to anyone, regardless of income, who lost his job, adding 1.2 million people to the program’s enrollment and billions more in new spending.
Some may argue that Republicans were just as guilty when they had control of Congress, especially with the addition of an expensive prescription-drug benefit to Medicare. But few remember that President Bush pushed Congress to move the rest of the program toward a “premium support” or defined-contribution model for new enrollees. That idea was dropped from the legislation to ensure some Democratic support for the bill. And it wasn’t the only time reforms have been pushed, at great political risk, by Republicans, only to be derailed by Democrats. Remember the Medicare Commission of the late 1990s? All Republican appointees to that commission voted in favor of a dramatic restructuring of the program; it was the Clinton appointees who blocked the idea from moving forward. And, of course, in 2005 President Bush proposed to make Social Security permanently solvent, without a tax increase, and that plan went nowhere. Democrats in Congress expressed firm opposition, defended the status quo, and used the Bush proposal to attack Republican congressional candidates in the 2006 election as favoring “cuts” in Social Security.
With this recent history, Republicans have every right to be wary about Obama’s real goals for the summit. To avoid a lot of wasted time, Republicans who are invited to participate could do everyone a favor by testing the president’s seriousness. If he really wants to work with them to solve the nation’s long-term budgetary challenge, he should be willing to reveal his plan to fix the problem, as certified by the actuaries who run the numbers. That means getting specific about the taxes he would raise and t
he benefits he would cut to keep the programs solvent for at least 75 years. If Obama showed the political courage necessary to put forward such a plan, he would certainly earn the right to mount the bully pulpit and push others to be “fiscally responsible.”
Until then, however, Republicans can reasonably assume that the president is unwilling to take on the political risks associated with getting the job done.