Can Obama avert a fiscal catastrophe?

By Fred Hiatt
Monday, March 29, 2010; A19

Last summer President Obama told me that once health reform became law, he could pivot to the "broader structural changes" needed to bring the federal deficit under control.

Without health reform, he said during a July telephone interview, there would be no hope for fiscal reform. With it, he would be in a position to "start laying out a broader picture about how we are going to handle entitlements in a serious way."

Well, it's been six days since he signed the bill, and he still hasn't saved Social Security.

Just kidding. We can give him another day or two.

But the long-term threat is no joke, as Obama has acknowledged many times. If Obama does not pivot, the country will be in serious trouble.

Why? According to a Congressional Budget Office analysis published last week, Obama's budget plan has the government spending one-quarter of the national economy (25.2 percent of gross domestic product) 10 years from now, while collecting revenue that's less than one-fifth (19.6 percent).

Such a gap isn't sustainable for any country. The United States would have to borrow so much money that in interest alone the government would be spending 4.1 percent of GDP -- compared with 1.4 percent this year. Other programs -- for defense, for the poor, for national parks, for everything -- would be squeezed more and more. The United States would be increasingly at the mercy of China, Saudi Arabia and other lenders.

"I understand why a deficit hawk would be nervous," Obama told me last July. "I'm nervous about this. And if you talk to my senior advisers, they'll tell you I'm on them every day about how are we going to make sure that we're positioning ourselves to take care of this long term."

But if he's talking with his advisers, Obama hasn't begun to prepare Americans for what such positioning will take.

Here's one measure of the challenge: The president touts health reform in part because it will reduce the deficit -- according to the CBO, by $143 billion in the next 10 years.

That sounds pretty good, until you consider that Obama would need the equivalent of 70 additional health bills to undo the $9.8 trillion that his budgets will add to the deficit during the next 10 years, according to the CBO.

(Actually, it would take something like 220 health-care bills of deficit reduction, because the true savings from health care are more like $44 billion, once you subtract $70 billion in premiums that people will pay for long-term-care insurance and $29 billion they will pay into the Social Security trust fund, all of which will have to be paid out later. But either way, it's a frightening picture.)

What will it take? The government will have to spend less and tax more. The Bush tax cuts should be allowed to expire this year, as the law was written. The gasoline tax should be higher. Retirement ages need to be gradually pushed back. People who don't need as much help shouldn't receive full Medicare benefits. And so forth. There are no secrets here.

So what's the administration's plan? The president appointed a bipartisan commission last month to study the matter. Until it reports -- after the November elections -- officials hope to do not much at all. Obama and just about everyone in Congress favor extending the Bush tax cuts for all but the wealthy; that alone will cost $2.5 trillion over the next 10 years.

The truth is almost no politicians are honest about what's needed. Republicans talk a good game now on deficits but were wildly irresponsible while they were in control. Democrats aren't about to give them an opening by raising their hands first to propose unpopular spending cuts or tax hikes.

Last summer I asked the president how he could overcome such inertia, given the almost impossible politics of deficit control. He suggested that events might jump-start the politics, when lenders start to fret about the creditworthiness even of the United States.

"I actually think that, sadly, decisions are going to be forced upon us," he said. "I mean, I think that if we don't show that we're serious in some fashion, then I think you're going to see a reluctance on the part of people who've been snapping up Treasurys to keep doing so. . . . And that, in some sense, will -- certainly compels me, if I'm being responsible in my office, to push hard on this."

Obama scrapped and cajoled and persisted, and he got his health-care reform. When he pivots to fiscal reform, as promised, he may look back to health care as the easy one.

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