Deficit Distortion Makes for U.S. Fiscal Disaster: Albert R. Hunt

Social Security “is being used as a piggy bank” for the U.S. government as retirees are asked to “pay the price for the excess of Wall Street.”

“We don’t have the courage to reduce spending so we increase taxes,” the approach politicians use “every time we get into a deficit situation.”

The first observation was from former Democratic Congresswoman Barbara Kennelly of Connecticut, now a lobbyist for senior citizens. The other is from Arizona’s Jon Kyl, the second-ranking Republican in the Senate.

These charges share commonalities: They were made in opposing the creation of an advisory bipartisan panel to make deficit-reduction proposals, and substantively range somewhere between hyperbole and distortion.

Any real deficit reduction won’t principally be borne by the elderly, nor will it be limited to tax increases.

The Kennelly-Kyl axis, however, demonstrates the bipartisan lack of will to deal with a chronic and potentially disastrous long-term federal budget deficit.

“We hear a lot of talk from lawmakers in both parties about the need to reduce deficits, but it’s just talk,” says Isabel Sawhill, a senior fellow at the Washington-based Brookings Institution. “All talk and no action is exactly why the public is so fed up with Washington.”

Horrifying Economics

The numbers are stunning. Over the next 10 years, under President Barack Obama’s budget, the total deficit would be $8.5 trillion; by 2020, the interest payments on the debt would be almost as much as projected spending on all discretionary domestic programs and as much as Medicare outlays that year. The national debt would be approaching $20 trillion in 2020; nice symmetry, horrifying economics.

Most Democrats, including the administration, offer only lip service to addressing this crisis. It would be foolish to cut spending or raise taxes with unemployment at close to 10 percent; the long-term efforts, however, are timid.

The president’s budget slices some nickel-and-dime programs, while avoiding major reductions. On entitlements, Social Security, Medicare and Medicaid, the Obama budget is largely silent. These account for 38 percent of this year’s budget, rising to 46 percent of projected 2020 outlays.

In the separate struggle over health-care legislation, it’s the House Democrats who are vehemently opposed to a Medicare commission that would make recommendations on cost controls.

Prohibitive Tax Increase

More than a few Democrats say deficits can be taken care of on the tax side. Some Congressional Budget Office analyses might give pause. By 2020, balancing the budget by taxes alone would require a 30 percent increase in revenue.

That means the middle class would get clobbered. The top 5 percent of U.S. wage earners today already pays about 50 percent of federal taxes; unfortunately for these Democrats, there aren’t enough of the rich to soak.

The Democrats’ record on deficits looks good only in comparison to the Republicans. When the Senate voted the other day on establishing that independent fiscal commission, seven lawmakers who had been supporters, including Mitch McConnell, the Republican leader, switched and voted against it. Kyl suggested the commission would foist huge tax increases on an unsuspecting Congress.

What it really would have done was establish an 18-member commission of Democrats and Republicans and require that any recommendation to Congress would have to be supported by at least half the members of each party. Then Congress could reject any recommendations. It wasn’t too tough, but too toothless.

More Than Spending

McConnell says it all should be done on the spending side. To go to 2020, the projected $1.3 trillion deficit could be almost wiped out if all discretionary non-security domestic programs, including aid to education, the National Institutes of Health, and air-traffic controllers, were eliminated. Or if McConnell wanted to go the entitlements route, he could cut Social Security, Medicare and Medicaid outlays in half.

In a meeting with the president 10 days ago, House Republicans rightly complained they get a bum rap for not having any ideas. One of the brainiest members, Representative Paul Ryan of Wisconsin, has a comprehensive budget and tax proposal.

It, for sure, would cut spending, eliminating Medicare and Medicaid and replacing them with voucher systems or block grants to the states and partially privatizing Social Security. More than a few poor people and Americans with disabilities would get less health-care support.

Biggest Changes Ever

On Social Security privatization, Ryan doesn’t talk much of the severe losses some senior citizens would have suffered over the past two years.

On the tax side, the Ryan proposal envisions the most sweeping changes in U.S. history. He would retain President George W. Bush’s tax cuts for the wealthy at a cost of $700 billion over the next decade. His plan would also eliminate all taxes on capital gains, dividends and interest, with the bulk of the benefits going to those earning more than $1 million a year and would cut the corporate tax rate while adding an 8.5 percent business consumption tax.

“This would be the greatest transfer of wealth from the middle and working class to the wealthy that we’ve ever seen,” says Robert Greenstein of the Center on Budget and Policy Priorities in Washington.

Budget-Friendly Proposal?

The most delicious part of the sweeping Ryan proposal is his assertion that it is budget friendly, a claim he makes by citing a CBO analysis that even with massive tax cuts, revenue as a percentage of gross domestic product would be at 19 percent in 2030. How could that be? Simple, the CBO analysis makes clear: It’s because Ryan’s staff instructed them what it would be, not based on any analyses of what changes the tax cuts really would produce.

Or take a look at the poster child for conservative Republicans this political season, Florida Senatorial candidate Marco Rubio, now favored to beat Governor Charles Crist in the primary. Rubio supports the $700 billion extension of the Bush tax cuts for the wealthy; cutting taxes on capital gains and dividends and the corporate tax rate and bolstering defense spending. He also favors a constitutional amendment to balance the budget. He doesn’t tell voters how he would get there.

He might consult Ryan, who has discovered the elusive remedy to the deficit dilemma. Voila! Just say it’s cured.

(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net.

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

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