Heritage Foundation Scholars respond to Obama debt reduction proposal (Part 2)

I love going to the Heritage Foundation website for articles like this:

Obama’s Debt Reduction and Tax Proposal

Heritage Responds to Obama’s Debt Reduction and Tax Proposal

Mike Brownfield

September 19, 2011 at 11:16 am

Heritage’s experts watched President Barack Obama’s debt reduction and tax increase proposal. Here are their immediate reactions:

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The President’s Debt Reduction Proposals: The Wrong Diagnosis

The President’s “debt reduction” proposals released today are a fine statement of liberal ideology, but a poor attempt at fiscal policy. His so-called “balanced approach” – using a mix of spending reductions and tax increases – is the wrong formulation to start with. It merely perpetuates a misunderstanding of the fundamental problem: deficits and debt are symptoms; the underlying illness is excessive and uncontrolled spending.

The federal government today is claiming roughly one-fourth of total economic output – about 25 percent of gross domestic product (GDP) – a post-World War II record. This is dead weight on the economy, because every dollar of spending gets paid for – through taxes, borrowing, fees, offsetting receipts, etc. – and hence is no longer available to growth producing activities in the economy. That is why spending is considered one of the best measures of the size and scope of government. As Professor Allen Schick has written, fundamentally government is what it spends.

But even more problematic than the level of spending is its trajectory – especially in federal entitlements. According to the latest figures by the Congressional Budget Office, entitlement spending is projected to rise at a rate of about 5.3 percent per year. That is faster than projected inflation, and faster than nominal GDP. So even if the gap between spending and revenue were closed, entitlements would immediately begin outrunning taxes again, resurrecting deficits.

As is well known, the problem is most acute in the Big Three entitlements: Social Security is growing at a rate of 5.8 percent per year, Medicare at 6.3 percent, and Medicaid at 9 percent. Clearly, these growth rates cannot be lowered by trimming around the edges of the programs, cutting wasteful spending and overpayments, and squeezing medical providers. It requires fundamental reforms that alter the incentives toward overutilization and inefficient delivery of medical services. But these are exactly the kinds of things the President has ruled out. He expressly rejects adjusting benefits or eligibility. He claims his proposal will save $248 billion in Medicare, of which 90 percent would come from reducing overpayments, not from restructuring the program. This is not a serious proposal for addressing the government’s spending and debt problems.

Similarly, he claims savings “that build on the Affordable Care Act” almost entirely from vague improvements in efficiency: “by reducing wasteful spending and erroneous payments, and supporting reforms that boost the quality of care.” Nevertheless, it is curious that his vaunted health care program – which was advertised as reducing deficits – is so inefficient that it is already projected to generate $320 billion in overspending over the next 10 years.

In addition to all these failings, the President takes credit for a whopping $2.3 trillion in spending reductions that either are already assumed, or are based on manufactured spending projections.

First he claims $1.2 trillion in savings (including debt service reduction) from the spending caps in the Budget Control Act. Those are not new savings.

Even more exotic is his $1.1 trillion in savings from drawing down military activities in Iraq and Afghanistan. The President’s budget proposed a total of just $576.5 billion over 10 years for Overseas Contingency Operations (OCO). This amount consists of a $126.5-billion request for fiscal year 2012, and then placeholders of $50 billion a year through 2021. In other words, the 10-year total is largely illusory. Even if it were real, however, it would be impossible to save $1.1 trillion in war spending when the President proposed to spend only about half that amount. It appears the savings are measured against a Congressional Budget Office (CBO) baseline hat assumed the peak, 2010 “surge” level for war spending, and then inflated it for subsequent years. This was an unreal figure to begin with – and one CBO removed in estimating discretionary savings in the Budget Control Act – and yet the President assumes the savings. This is emblematic of just how disingenuous his debt reduction plan truly is.

This is not a serious effort to address the government’s very real spending and deficit crisis – which has worsened significantly in the past two-and-a-half years. It is, to repeat, ideology, not policy.

Patrick Louis Knudsen
Grover M. Hermann Senior Fellow in Federal Budgetary Affairs

Tax Hikes Not the Answer, but Obama Wants Them to Be

President Obama seems intent on not solving our budget and debt crisis. Indeed, he seems almost fixated on making it worse.  His latest plan would immediately ramp up spending to “jolt” job creation in ways that have proven to fail. Once again, Obama is sticking to his strategy of ramping up spending thus “locking in” higher levels that make the job of budget cutters more difficult.  Somehow, he maintains, this is necessary and right for America, making it seem that this spending is inevitable and inexorable.  Thus, the only thing we can do is to hike taxes.

Riiiiiiight.

Tax hike are not the answer.  Plain and simple.  Unless we fundamentally tackle entitlement programs taxes will have to be perpetually raised to keep pace with dramatic growth in spending as Medicare, Medicaid and – yes Mr. President — Social Security grow like a giant tsunami blowing toxic red ink all over the budget and the economy.

Yes, the President did propose spending cuts.  Teeeeensie tiny ones.  $250 billion to Medicare and $72 billion to Medicaid likely over ten years. But bear in mind these are two of the biggest and fastest growing programs in the budget. Medicare this year alone is over $500 billion and over the next ten years will likely reach $7.5 trillion.  But here, the devil is in the details.  The small changes he may propose that would affect retirees will be backloaded – until after any possible second term.  And he abandons future retirees by taking any changes to Social Security off the table. He’s right that spending cuts alone aren’t the solution – the policies must be right too.

Obama is demanding a “balanced” approach as though somehow hiking taxes is both fair and necessary.  But this notion that he is pushing – half tax hikes and half spending cuts – is beyond the class warfare message it sends.  It is a tactic.  A tactic to stall the real reforms that our leaders in Washington must undertake now in order to avert a fiscal, economic and moral crisis.

The simple fact is that our budget and debt crisis can be solved without hiking taxes.   Saving the American Dream, the Heritage Plan to Fix the Debt, Cut Spending and Restore Prosperity is a bold, innovative plan that does just that.  It transforms our entitlement programs, rolls back wasteful and inefficient spending, protects the nation and overhauls our punitive, inefficient and uncompetitive tax code.

Federal Spending needs a complete do-over. We must return to our roots our founding fathers’ laid out – of a limited government. A low tax, low spending and fast growing nation.  One where our kids can enjoy the same kind of opportunity as their parents and grandparents.  One where our seniors know they can go into retirement with the economic security that they will be able to access quality health care that works for them, and a Social Security benefit that will protect them from poverty.

President Obama’s newest plan is simply his April speech cast under the lighting of the Super Committee with the election as a backdrop.  The nation needs more.

Alison Fraser

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