Minding America's Spending Gap

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Niccolo and Donkey
Minding America's Spending Gap

Keeping America's spending in line with its revenue – a tricky balancing act at the best of times – is made harder for Barack Obama by the Big Three programs: Medicaid, Medicare and Social Security.

Niccolo and Donkey
Obama, Republicans circle the wagons against economic reality

The Globe and Mail

Konrad Yakabuski

February 15, 2011

The good news is that Barack Obama and the Republicans actually agree on something. The bad news is that their complicity in whistling past the fiscal graveyard could soon come back to haunt them and their nation.

As the U.S. President unveiled his budget proposals for the 2012 fiscal year, which begins in October, there was more left unsaid about the triad of budget busters – Social Security, Medicare and Medicaid – than about the modest spending reductions Mr. Obama is calling a “down payment” on deficit reduction.

Republicans put on a good partisan show. Eric Cantor, the GOP leader in the House of Representatives, lamented that Mr. Obama was continuing “the bad habits of the past four years.” But they were no more willing than the President to address the 800-pound gorilla on Capitol Hill.

While Republicans would cut more deeply in certain areas (and less in others), neither they nor the President appear ready to take on Social Security, Medicare and Medicaid, which together will drive the federal debt about $9-trillion (U.S.) higher over the next decade.

Instead, the partisan argument over what to cut involves a fraction of total spending – the 12 per cent of overall annual expenditures of $3.7-trillion that make up discretionary items, and a sliver of the defence budget. But unless Congress acts soon, spending on the Big Three entitlement programs will soon squeeze out everything else, anyway.

As New York Times columnist David Brooks aptly noted on Meet the Press on Sunday, Mr. Obama and the Republicans are essentially “wrestling over the bed sheets on the Titanic.” What they should instead be doing is trying to turn the ship around – before financial markets force them to.

For all the Republican talk of slashing the size of government, and despite Mr. Obama’s repeated pledge to “take responsibility” for deficit reduction, neither side appears willing to bear the political risk of toying with the entitlement programs that most Americans – even Tea Partiers – consider sacrosanct.

“The administration and congressional Republicans have come to two versions of the same [political] conclusion – namely that, if they do anything significant on the big, rapidly growing spending items, they’re going to get killed,” Brookings Institution senior fellow William Galston explained.

Neither side has prepared the American public for the excruciating reforms – either in the form of cuts to Social Security and Medicare benefits or dramatically higher taxes – that would be required to put the country on a sustainable fiscal track. To embark on such reforms without advance pedagogy would be to risk voter revolt.

As a result, the budget debate consuming Washington is limited to tangential ideological bickering about whether the federal government should be increasing its investments in education, research and infrastructure – no-brainers for most developed countries, not to mention China.

“Even as we cut out things that we can afford to live without, we have a responsibility to invest in those areas that will have the biggest impact on our future,” the President insisted on Monday, when he visited a Maryland “magnet” school where Grade 6, 7 and 8 students “specialize” in applied engineering or environmental science.

To win Republican approval for new education and infrastructure spending, the President is willing to sacrifice some programs cherished by Democrats. He is proposing $300-million in cuts to the Community Development Block Grant fund that he once fought to expand as a community organizer in Chicago. His budget also chops $2.5-billion from a program that helps low-income Americans pay their heating bills.

Republicans are refusing to bargain for programs they argue shouldn't exist in the first place. Before even discussing 2012 spending, they are seeking $62-billion in cuts during the remaining months of the 2011 fiscal year – for which Congress has yet to pass a formal budget.

Still, the fiscal rectitude of Republicans is circumstantial. They are resisting the President’s call to eliminate tax credits for oil, gas and coal companies and refuse to cut $3.5-billion for a second engine for the F-35 fighter plane. The administration argues the extra engine is redundant.

Not that it really matters in the grand scheme. As Mr. Obama’s own debt commission noted in calling for $4-trillion in spending cuts over 10 years, reining in the country’s structural budget deficit is impossible without Social Security and Medicare reform.

It's true that Social Security has not been a driver of recent deficits, which have been inflated mostly by short-term stimulus spending and plunging tax revenues during the recession. But it is also true that the public retirement fund’s accumulated “surplus” is an accounting fiction. Now, with the baby boom generation retiring in earnest, spending on Social Security benefits will balloon to $1.3-trillion in 2021, from $727-billion this year.

Expenditures on Medicare, the federal health-insurance plan for seniors, will grow from less than $500-billion now to $800-billion. Spending on Medicaid, which funds basic health care for the poorest Americans, will double to $600-billion.

Tack on interest payments on the federal debt – set to more than quadruple to $928-billion in 2021 – and America is about to dig a debt hole all the way to, well, China. Indeed, the continued indulgence of America’s top creditor will be required to enable this fiscal indiscipline.

“The less hopeful interpretation” of Mr. Obama's budget, Brookings' Mr. Galston offered, “is that the President wants to play rope-a-dope until he gets his re-election out of the way and then he’ll think about fiscal statesmanship – if ever.”

Americans, and the world, had better hope the Chinese go for it.

New spending
Up-front spending of $50-billion to kickstart infrastructure projects.

Allocating about $150-billion over 10 years to extend and expand tax breaks for research spending.

Increasing the Department of Education's budget by 6 per cent in 2012, to $77.4-billion, with a goal of training 100,000 new science, technology, engineering and math teachers over 10 years.
The Energy Department's budget gets a 12-per-cent increase, to $29.5-billion, over 2010 enacted levels. This includes doubling to six the number of Energy Innovation Hubs that will research rare earth materials, battery and energy storage and Smart Grid energy transmission. The department's office of science gets $5.4-billion for long-term clean energy research and development.

On the chopping block
Reducing the budget of Community Development Block Grant program by 7.5 per cent, or $300-million. The CDBG funds affordable housing, anti-poverty programs and infrastructure in low-income neighbourhoods. As a community organizer in his former life, Mr. Obama fought for increases in the program.
Enacting a two-year salary freeze for federal government employees.

Eliminating grants for low-income students who attend summer school, and allowing interest on government loans to graduate students to accrue while they are studying.
Freezing spending outside of national security, Social Security and Medicare, for five years.

$1.3-billion cut to EPA funding and takes a significant hit at the Great Lakes Restoration Project, which would lose $125- million under the new budget.

Can't cut entitlements, the dependents are too powerful politically. Maybe they will be snipped just a little bit, but not significantly enough to alter our course.

Can't raise taxes -- at least not to the extent that we would need to correct this problem.

Remember David Walker and the "Menu of Delayed Pain"? Americans would never accept this level of taxation.
YouTube: https://www.youtube.com/embed/I-16u9x3tfE

We'll just keep printing money and fueling bubbles until Dollar hegemony ends. The show must go on.