Barack Obama did not disappoint in his much-hyped speech Wednesday on how to address the nation’s fiscal problems. I expected generalities and overly optimistic projections larded with some demagogy on Republicans destroying Medicare. That is what we got.
Perhaps the president’s proposals, taken together with those offered by House budget chairman Paul Ryan, Republican of Wisconsin, constitute a step toward deficit reduction. But it is a darned small one that does little to reduce that chances that problems will fester until harsh external circumstances force both sides to abandon self-serving wishful thinking.
I have some specific complaints. The first is with Obama casting things into a 12-year planning horizon. News announcers vied with each other in placing emphasis on Obama’s “four trillion dollars” in spending cuts. That is a lot more dramatic than saying $333 billion per year at a time when we face deficits three times that. Ryan at least used a 10-year timeline instead of 12.
Decades ago, people discussed taxing and spending changes largely in terms of how they would change the next fiscal year or two. That created perverse incentives for officials to devise budgetary time bombs, popular spending programs or tax cuts that would solve an immediate national problem or win votes in the short run while the full budgetary effects would show up only one or two election cycles down the road.
So the move to require that the effects of taxing and spending changes be projected over a 10-year planning horizon was, on the whole, an improvement. But while this cured one set of perverse incentives, it created others. It allows people like Ryan and Obama to make sweeping promises involving enormous sums over a decade or more while avoiding any specifics that might involve true hard choices in the short run.
Moreover, the incentive to devise time bombs remains; the only change is that the fuses must be longer. Witness the automatic expiration dates included in the original Bush tax cuts. They were the only way to conceal the true fiscal folly of these cuts and provide some political cover for politicians who feared the result would be growing deficits. Everyone involved knew they were phony, but they provided enough of a fig leaf to get needed votes for passage.
My second complaint is Obama’s resort to “magic asterisk” measures like “automatic” curbs on popular tax deductions if, years down the road, deficits don’t drop as rosily predicted. This is as hokey as the automatic ends to cuts in the Bush tax cuts. If there is no political will to take such steps now, neither will there be six or eight years from now.
On the two big medical entitlement programs, Obama engaged in truthful demagogy, waving the bloody shirt of “the Republicans are going to take away your Social Security and Medicare.” This is as expected as Republicans waving an equally stained shirt of “the Democrats are going to raise your taxes.”
The president was truthful, however, in noting that Ryan’s proposal would fundamentally end Medicare and Medicaid as they have existed for more than four decades, converting one to a voucher program and the other to federal block grants to states. The problem was that the president did not really acknowledge that either taxes must be raised substantially to support the two programs as currently operated or the programs must be fundamentally restructured.
Obama’s proposed changes to these programs, including expert panels to rule on cost-effectiveness issues, are like the usual Republican suggestions of national insurance exchanges or limits on malpractice judgments. All are good ideas but minor in scale compared to the fundamental technological and demographic forces pushing medical spending up.
Just as Ryan deserves some credit for suggesting concrete changes in medical entitlements, so Obama deserves credit for talking of tax increases. If only he had the courage to move away from tired rhetoric about increasing taxes only for the rich.
This argument appeals to the Democratic base. It seeks an end run around GOP rhetoric about increased taxes. And it has some substance in the fact that most of the increases in national income over the past three decades have gone to the highest-income 20 percent of all households.
But it reinforces the belief that everyone in the nation is groaning under an unprecedented tax burden. This is an appealing myth, but one not borne out in fact.
During the 1980s, a family of four earning the median national income for such a household ($75,954 in 2009) paid more than 10 percent of its income in federal income taxes. Since 2003, that average has been less than 6 percent.
Families earning twice the national median paid more than 16 percent in these taxes in the 1980s compared with less than 13 percent in recent years. For the nation as a whole, individual and corporate income tax revenues are at their lowest level, relative to the overall size of the economy, in 60 years.
Accentuate the positive. Despite the limitations of Obama’s offering, and of Ryan’s, let’s hope that we are at least moving in the right direction, however slow and timid such movement is.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.
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