Joined: Sep 2009
How Obama's Speech Muddled the Budget Debate
How Obama's speech muddied the budget debate
By Robert J. Samuelson
Wednesday, January 26, 2011
It was a teachable moment - and Barack Obama didn't teach. Unless public opinion changes, we won't end our budget deadlock. As is well-known, Americans want budget deficits curbed. In a new Kaiser Family Foundation poll, 54 percent urge Congress and the president to "act quickly" and 57 percent prefer spending cuts to tax increases. But there's little support for cuts in Social Security (64 percent opposed), Medicare (56 percent) and Medicaid (47 percent), which together approach half of federal spending. The State of the Union gave Obama the opportunity to confront the contradictions and educate Americans in the unpleasant realities of uncontrolled government. He declined.
What we got were empty platitudes. We won't be "buried under a mountain of debt," Obama declared. Heck, we're already buried. We will "win the future." Not by deluding ourselves, we won't. Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives). Obama indulged these fantasies.
If deficits stemmed mainly from the recession, this wouldn't matter. They would shrink as the economy recovered; tax collections would rise and spending (on unemployment insurance, food stamps) would fall. Unfortunately, this isn't the case. In fiscal 2010, the deficit - the gap between government spending and revenue - was $1.3 trillion. Of that, about $725 billion was a "structural" deficit, says Mark Zandi of Moody's Analytics. That is, it would exist even if the economy were at full employment (5.75 percent by Zandi's estimate).
Even this arithmetic may be misleading. Falling interest rates - reflecting the recession and Federal Reserve policy - have lowered the government's interest payments despite ballooning debt. In 2010, federal interest costs were $197 billion, down from $253 billion in 2008. But as the economy strengthens, interest rates will rise, offsetting some of the recovery's beneficial effect on the deficit. By 2020, annual interest payments could approach $800 billion, projects the Congressional Budget Office.
We cannot have a useful debate on the role of government - what it should do, for whom and at whose expense - if Americans are highly misinformed. Obama should have dispelled some common budgetary myths. Consider three:
l Myth: The problem is the deficit. The real issue isn't the deficit. It's the exploding spending on the elderly - for Social Security, Medicare and Medicaid - which automatically expands the size of government. If we ended deficits with tax increases, we would simply exchange one problem (high deficits) for another (high taxes). Either would weaken the economy; and sharply higher taxes would represent an undesirable transfer to retirees from younger taxpayers.
l Myth: Eliminating wasteful or ineffective programs will close deficits. The Republican Study Committee - 176 House members - recently proposed $2.5 trillion of cuts over a decade in non-defense, non-elderly programs. This plan would kill dozens of specific programs. Now, many of these programs should go; they're either unneeded or ineffective. Consider one candidate for elimination, the Corporation for Public Broadcasting. In an information-drenched society, it's hard to justify government subsidies for TV and radio.
But this budget category covers only a sixth of federal spending, and squeezing it harshly would penalize many vital government functions (research, transportation, the FBI). The Republicans' cuts are huge, about 35 percent. Even so, they would reduce projected deficits by at most a third. Over the next decade, those deficits could easily total $7 trillion to $10 trillion.
l Myth: The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so. Both programs are pay-as-you-go. Today's taxes pay today's benefits; little is "saved." Even if all were saved, most retirees receive benefits that far exceed their payroll taxes. Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study.
It's a cliche, but true: There are no easy - or popular - solutions. Controlling the budget requires some combination of (a) reducing benefits for the elderly; (b) downsizing other programs, including defense; and (c) raising taxes. Not only did Obama avoid choices, but he failed to frame the debate in a way that clarified what the choices are. So public opinion remains muddled, and politicians - sensitive to public opinion - remain stalemated.
Obama's expedient evasion is the opposite of presidential leadership. It maximizes short-term approval ratings while running long-term risks. A loss of investor confidence could trigger a chaotic flight from Treasury bonds and the dollar. One economist recently wrote in the Financial Times: "I hope it does not ultimately require a crisis to restore fiscal [responsibility] . . ., but I fear it will." That was Peter Orszag, Obama's first budget chief. Sobering.
Joined: Jul 2009
This article muddles the debate. He makes a number of absurd comments; "It's the exploding spending on the elderly - for Social Security, Medicare and Medicaid - which automatically expands the size of government."
While there are possible modifications to be made to the last two programs, (e.g., fraud) Social Security adds NOTHING to the deficit; and excess monies to SS have been drained off to pay for other expenses. Raise the cap on deductions - problem SOLVED.
Anyone who wants to cut support for social programs before attending to the defense budget, corporate evasion of taxes and corporate subsidies and the extension of tax cuts for the wealthy is not to be believed.
Last edited by Atypical; 01-27-2011 at 08:49 AM.
Joined: Sep 2009
I have to agree with you Atypical, even though i posted the article.
Joined: Jan 2009
Location: Ann Arbor, MI
Atypical, what do you mean when you say "raise the cap" on deductions? For the life of me, I cannot understand why one stops paying FICA after 106,800 in earnings. Eliminate that cap, and PROBLEM SOLVED.
Joined: Jan 2009
Location: Ann Arbor, MI
The Obama Presidency remains in a dangerous state of denial
By Nile Gardiner
Last updated: January 26th, 2011
If there is one big takeaway from Barack Obama’s State of the Union address last night, it is that this presidency remains in a complete state of denial regarding the massive threat the United States faces with its budget deficit. Obama’s speech was a major lost opportunity to address the number one menace to America’s long-term prosperity – the towering mountain of debt. Ironically, Obama’s head in the sand speech came just a day before the release of the Congressional Budget Office’s latest economic outlook, which revealed that the deficits generated under the Obama administration are the largest since 1945. As the report states:
The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation’s output, respectively.
… Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP.
With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government’s annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.
In contrast to the president, Wisconsin Congressman Paul Ryan, chairman of the House Budget Committee, conveyed a far more credible and serious message in his response to the State of the Union. As Ryan noted:
Our nation is approaching a tipping point. We are at a moment, where if government’s growth is left unchecked and unchallenged, America’s best century will be considered our past century. This is a future in which we will transform our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.
…. We need to reclaim our American system of limited government, low taxes, reasonable regulations, and sound money, which has blessed us with unprecedented prosperity. And it has done more to help the poor than any other economic system ever designed. That’s the real secret to job creation – not borrowing and spending more money in Washington. Limited government and free enterprise have helped make America the greatest nation on earth.
Across Europe, governments are at last beginning to acknowledge the sheer scale of the debt problem, and in some cases taking immediate action to deal with it, especially in Britain. In the UK the Coalition plans to eliminate the structural deficit altogether by 2015, and intends to cut 490,000 public sector jobs, nearly one in ten of the 6 million total for the UK, with an immediate goal of reducing government spending as a percentage of GDP from 47.5 percent to 41.5 percent by 2015. Most UK government departments will have their annual budgets cut by 19 percent.
In contrast, all President Obama is offering is to freeze government spending for the next five years. The Obama administration is sleepwalking America towards long-term economic decline by saddling future generations with a burden of epic proportions. The brutal truth remains that the Obama presidency does not have a plan in place to eliminate the deficit, and continues to be wedded to an outdated, Big Government mentality that will ultimately bankrupt the world’s only superpower unless it is dropped. America needs more economic freedom, less government intervention, and a dramatic cut in government spending to avert an impending crisis. Barack Obama however remains in a dangerous state of denial and continues to move in the opposite direction.
Nonsense, we need to "invest" in infrastructure.
Joined: Sep 2009
This last article is supportive of Paul Ryan who most people agree is proposing a radical solution to cutting the deficit. He wants to essentially eliminate Social Security (privatize it) and Medicare. It is well known that many Republicans themselves are scared of being seen as supporting these solutions.
Obama has stated numerous times that its important to bring down the budget deficits for the health of our economy.
Whats inflammatory is stating that Obama "remains in a COMPLETE state of denial" about this. Absolutely absurd to make this statement as his State of the Union speech (not to mention many other comments he has made) was partially about the critical need to address the budget deficit. What is in disagreement is what to cut, how much, and how fast.
P.S. Obama is not JUST proposing to freeze govt for 5 years. That is a blatant misrepresentation
of his position and a obvious ideological and distorted attack.