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Who's passing the deficit test?

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MichaelGerson
April 29, 2011
— The deficit debate, now fully engaged, is also an evaluation of political seriousness.

House Republican leaders have passed the test, supporting a politically risky budget that changes Medicare into a premium-support program and eventually returns federal spending to sustainable levels.


At first glance, this looks like courage. Actually, Republican leaders had little choice. If they had not proposed serious entitlement savings, their budget would have reduced long-term debt less than President Obama’s since they could not include Obama’s tax increases. A budget this timid would have sparked a Republican uprising. It was entitlement reform or mutiny.


As it stands, Paul Ryan’s budget is a political compromise—enough to produce greater savings than Obama’s, without too much tea party militancy. Under Ryan’s plan, total federal spending as a percentage of the economy remains about 1 percentage point higher than it was during Bill Clinton’s second term. The growth of Medicare benefits would be limited over time, but they would also become more progressive because the program would be means-tested. A budget that is radical when compared to recent history is also moderate when compared to the fiscal challenge.


Obama, in contrast, has largely failed the deficit test, combining unrealistic proposals with politically charged attacks on alternatives. The administration’s approach is also radical—but few fear it because it is so unlikely to be applied.


Obama’s continual tightening of cost controls within Medicare is eventually indistinguishable from government rationing. This becomes a scandal when moved from a budget chart to a hospital room.


And the president’s talk of tax increases on “millionaires and billionaires” is a transparent distraction. There simply aren’t enough of the spectacularly wealthy to meet Obama’s considerable revenue needs. More serious Democrats talk of repealing all of the Bush tax reductions, not just those on the rich—raising $3.9 trillion in revenue over the next decade. The problem is that more than $3 trillion of this total would come from those making less than $250,000 a year—a group that Obama is honor-bound to protect from pillage. A few Democrats such as Robert Reich talk of repealing not only the Bush tax cuts but also the Reagan tax cuts, returning America to a top income tax rate of 70 percent.


The fiscal problem is difficult but not complicated. Federal spending is now more than 24 percent of the economy—well above the historical norm. (The average during Clinton’s presidency, for example, was about 19 percent.) But tax revenues are currently under 15 percent of GDP, leaving a gap of almost 10 percentage points between outlays and revenues.


Republicans propose to bring down federal spending as a percentage of the economy, mainly through reductions in entitlement benefits that would be painful, but would not be applied to anyone currently 55 or older.


Democrats propose to fund historically high levels of spending by taking in a larger percentage of the economy in taxes. Megan McArdle, economics editor for The Atlantic, estimates that a tax increase of 5 or 6 percent of GDP would require everyone’s tax burden to increase by a third. Economic growth would be undermined. Wealth would move toward nontaxable investments and shelters. The American economy would be less competitive in the world. But these problems are not likely to occur because tax increases on this scale are politically unrealistic. The resulting tax revolt would be uncontainable.


If neither the Democratic nor the Republican approach is taken, interest payments will consume more and more of the budget, creditors will become progressively more demanding, and dramatic, indiscriminate austerity will become unavoidable.


So how has the public fared in the deficit test? According to recent polls, Americans prefer spending cuts to tax increases by 2-to-1—while 78 percent are not willing to reduce spending on Medicare. Seventy-one percent don’t think Democrats go far enough in fixing the deficit problem—while a solid majority wants few or no modifications in the Medicare system. The results depend mainly on the framing of the questions.


Public opinion is both divided and pliant. This places a premium on responsible leadership—which the president has not shown. It is not responsible to suggest that serious entitlement reform is unnecessary, or that the costs of expansive government can be borne by a few. Obama rightly believes that most Democrats will embrace these arguments. He is calculating that independents will be frightened by the Republican alternative.


But by playing this game, Obama is squandering his reputation as the adult in the room. This political judgment calls into question the rest of Obama’s judgment.


Michael Gerson is a columnist for the Washington Post Writers Group; email michaelgerson@washpost.com.

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