For The Peace Dividend, The `Defining Moment' Is Now

Groan. It's budget time again. That must mean a whole new round of arcane disputes over process and a few feints at fiscal discipline. Nothing, it seems, ever changes. But two events--the collapse of the Soviet Union and out-of-control health care costs--may give real people a stake in the capital's budget decisions. A year ago, General H. Norman Schwarzkopf called the Persian Gulf war a "defining moment." In its way, so is the budget debate.

What do the end of the Soviet empire and health care inflation have in common? To put it simply, the government over the next decade is going to spend $200 billion to $300 billion less than it had planned on the military. That leaves Congress and the President with a historic choice: They can give the money back to the people in the form of tax cuts. They can pay off some of the government's $3 trillion debt. Or they can shift the money to investments intended to increase productivity and competitiveness.

The choice will do much to shape the U.S. economy in the next century. "We have to answer the question about what kind of defense structure we're going to end up with, and we've got to be specific about what we're going to do with the money," says House Budget Committee Chairman Leon E. Panetta (D-Calif.). "The defense savings could all get eaten up quickly."

GUNS OR BAND-AIDS? But whatever choice Congress and the President make will be moot if they don't also craft a comprehensive plan to contain medical costs. Otherwise, every dime cut from the military budget will flow into the bedpan economy.

The numbers are stark. Some of the more ambitious plans on Capitol Hill would pare defense spending by up to $345 billion over the next decade. But under current law, costs for just the two biggest federal health programs--medicare for the elderly and medicaid for the poor--are projected to rise by $325 billion in the same period. Looked at another way, Pentagon spending may fall to about 3.5% of gross national product from today's 5.3%. But the government's medicare and medicaid bill will explode to more than 5.2% from the current 3.2%. By the turn of the century, the government will spend $500 billion a year for medicare and medicaid--and tens of billions more in smaller health programs and indirect subsidies, such as tax deductions for medical-insurance premiums.

Health care reform, including cost containment and preventive care, will do more than buff up the federal balance sheet. Medical costs, including matching payments for medicaid, are overwhelming state and local governments. Those costs have to be financed with tax hikes, too, and the money that's poured into health won't go to education, transportation, or housing.

But the real challenge belongs to Washington. That's where the big bucks are. And that's where national health and fiscal policy have to be made. So far, there are some signs of awareness on the part of politicians, but precious little action.

MUDDY WATERS. On Capitol Hill, there is a growing sense of the reality of the peace dividend--an acknowledgement that lower defense spending presents an extraordinary long-term opportunity. But on health care inflation, there is only a vague consensus on the need for a far-reaching solution. There is no sense of what shape the answer should take.

The Bush Administration is approaching the problem from just the opposite direction. Bush seems prepared to test the muddied waters of the health care debate, although the piecemeal plan he's considering falls short of what is needed. But the President appears to be ducking the choices created by the end of the cold war. Instead, he's maintaining the artificial barriers of the 1990 budget agreement, designed to insulate Pentagon spending from domestic economic pressures.

The future of health care and the military are both questions that Washington must answer before it can seize its opportunity. With leadership, hundreds of billions of dollars can be freed up for productive uses. Just think of it: lower taxes, a big bite out the national debt, or cooperative business and government ventures to train workers, encourage research and development, fix crumbling roads. The problems aren't going away. But if Congress and the President don't act soon, the chance to address them will evaporate.

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