The welfare state wins this budget war
Note, for starters, that it won’t create much “fiscal drag” on the economy. The spending cuts are simply too small in a $15 trillion annual economy. The deal might shave one-tenth of 1 percent off annual growth in the next decade, estimates the forecasting firm Macroeconomic Advisers. Note also that the deal isn’t a victory for the Tea Party over liberals. Liberals got much of what they wanted while the Tea Party’s influence may wane. Taxes may rise if the Bush-Obama tax cuts expire at the end of 2012.
But the budget deal does reflect national priorities, for good or ill. It’s mostly a triumph of the welfare state over the Pentagon. Even before the deal, the Obama administration projected that — assuming continued withdrawals from Iraq and Afghanistan — defense spending would shrink to 15 percent of the budget by 2016. This would be the lowest share since before World War II. The deal’s cuts, potentially as much as $950 billion over a decade, would reduce that further. In the 1950s and ’60s, defense often was half of the budget.
Drastic military retrenchment seems unwise. It would threaten readiness, training and the replacement of aging weapons. Many planes, ships and vehicles are approaching or have passed their planned service lives, says Heritage Foundation defense analyst Mackenzie Eaglen. To take one example: F-18s were designed to fly for 6,000 hours; now, many are headed toward 10,000, she notes.
The defense cuts show how, contrary to conventional wisdom, the budget deal reflects liberal preferences. The liberal agenda came in three parts: First, raise taxes on high-income Americans to limit domestic spending cuts; second, protect the social “safety net,” especially Social Security and Medicare; and finally, cut defense spending to spare (again) domestic programs.
Liberals got two of three. They failed on taxes, the Republicans’ litmus test. But they prevailed elsewhere. Social Security, Medicare and most benefits (food stamps, Medicaid) for the poor, regardless of age, were put off-limits. Medicare reimbursement rates might be cut by 2 percent as part of a second round of reductions, but that’s small potatoes. Because retiree benefits constitute half of non-interest federal outlays, the deal isn’t hard on overall government spending.
The real budget story is how protecting these vast retiree benefits dominates policymaking. If you shield almost half of spending and still want to cut, pressure intensifies on everything else. Along with defense, the budget deal also squeezes that catch-all category, “domestic discretionary spending.” This covers many programs: roads, food safety, financial regulation, grants to states and localities, and much more.
We are penalizing general government to protect all retirees, no matter how healthy or wealthy. Earlier this year, the Congressional Budget Office projected that domestic discretionary spending would drop 30 percent — as a share of the economy — from 2011 to 2021. The budget deal will deepen that. President Obama keeps saying this spending will fall, again as a share of the economy, to its lowest level since Eisenhower. Why is he bragging about this?
The conventional wisdom holds that Republicans, hostage to the Tea Party, prevented a larger and more “balanced” deal by their rejection of any tax increases — ever. Not so. It’s true that Republicans were unbending on taxes and, at times, reckless in their rhetoric. It’s also true that, even with sizable spending cuts, tax increases will ultimately be needed to balance the budget. But it’s not true that only the right blocked a more comprehensive agreement.
Although Obama said he was willing to trim “entitlements” — presumably, Social Security and Medicare — he never laid out specific proposals or sought public support for them. There was more talk than action. Even if Obama had been more aggressive, he probably wouldn’t have carried most liberals, who adamantly oppose cuts. They regard Social Security and Medicare as sacrosanct. Not a penny is to be trimmed from benefits.
This is an extreme, even fanatical stance. Social Security and Medicare do create a safety net for many millions of poor and near-poor retirees. But for millions of wealthier retirees, they are handouts. Liberals’ unwillingness to admit and act on this distinction has long stifled meaningful budget debate. This would have doomed a bigger agreement.
Both the ideological right and left would have objected. The center couldn’t have overcome that alliance. We got what politics permitted. It’s a modest package. If fully implemented, it won’t dramatically affect economic growth. It would still leave large deficits — by one estimate, 3.5 percent of gross domestic product in 2021. That projection assumes that the economy regains “full employment.” This would usually be a safe bet, but after last week’s dramatic market turbulence, who knows?