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How Obama's speech muddied the budget debate

President Obama gave his second State of the Union address Tuesday before a joint session of Congress.

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Thursday, January 27, 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.


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