Obama Needs Long-Term Plan for Deficit

By Fred Hiatt
Monday, July 6, 2009

Since the Reagan era, some conservatives have hoped to shrink government by "starving the beast." Refuse to raise taxes, they figured, and eventually spending would have to fall.

It's beginning to look as though the new team may have a similar strategy, in reverse: Increase spending, and eventually taxes will have to be raised.

No official has articulated that to me as a strategy. But look at the evidence.

George Bush bequeathed to President Obama a nation heading slowly but surely toward fiscal disaster. Because of an aging population and rising health-care costs, spending -- primarily on Medicare, Medicaid and Social Security -- will steadily rise in coming years, as the nonpartisan and authoritative Congressional Budget Office explained in a report last month. Revenue is not projected to rise nearly as quickly. The result, if the government does not alter course: crushing debt that could lead to hyperinflation, prolonged depression, or both. Poor people would suffer most, and there would be many more of them.

"The systematic widening of budget shortfalls projected under CBO's long-term scenarios has never been observed in U.S. history," the CBO pointed out in its usual dry style. And: "All in all, the U.S. economy could contract sharply for a long period."

Obama's response has been to acknowledge the seriousness of the problem -- and make it worse. I'm not talking about his record-breaking stimulus plan, which was essential (if not ideally shaped) given the recession he also inherited. Rather, it is Obama's long-term budget that would more than double the projected deficit over the next 10 years, to $9 trillion, by extending most of the Bush tax cuts and limiting the alternative minimum tax while creating new programs and entitlements (to college tuition scholarships, for example) and refusing to cut back on existing ones.

And that's not to mention his top priority, universal access to health care. Obama has said that reform must be paid for, and he hopes it will lead to a slowing in the growth of health-care costs. That would hugely improve the long-term budget outlook.

But the prospects of cost control are tenuous, experimental, distant and politically fraught; by comparison, creating an expensive new entitlement is easy. Obama has proposed to pay for part of universal access by collecting more income tax from the wealthy, which would make the existing deficit that much harder to close. The cost of the entitlement could rise more quickly than the revenue paying for it. There is a good chance, in other words, that whatever emerges from Congress this summer will worsen the budget prognosis.

The bottom line is this: You cannot run a progressive government of the kind Obama favors by collecting only 18 percent of the gross domestic product in taxes, which has been the norm over the past 40 years. Nor can you increase the tax take to 24.5 percent of GDP -- which is what Obama proposes to be spending in 2019 -- simply by making the rich pay more.

But rather than level with the American people about this, or lay out a plan to raise the needed taxes, the Obama administration and the Democratic Congress are putting the spending pieces of progressive government in place and apparently counting on the tax piece to fall into place later.

Just to be clear: I support universal access to health care, and I don't think there's any natural law that says the U.S. economy couldn't function with higher taxes -- say, 22 percent of GDP. But you can't get there without wrenching changes -- abolishing the mortgage and charitable deductions, for example, or instituting a nationwide consumption tax. And unless you raise taxes so high that you risk choking economic growth, you also will have to trim Medicare and Social Security benefits.

It would be foolishly counterproductive to begin closing the gap in the midst of recession. But you could be setting long-term changes in motion -- adjusting rules for people who will retire five or 10 years from now, for example.

Obama and his economic team understand all this, and maybe they have a plan to get from here to there. Maybe they'll do the popular stuff first, and then next year, or next term -- as global investors become alarmed at the U.S. fiscal outlook and begin driving our interest rates higher -- persuade Congress to take its medicine and get the fiscal house in order.

But let's not forget how that starving-the-beast thing worked out. Conservatives were happy to cut taxes, but cutting spending didn't appeal all that much, and deficits soared. By postponing all the "hard choices" he warns of, Obama may be scripting a sequel.


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