Trillion-dollar deficits are not the answer

March 26, 2009

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

On Tuesday, President Obama suggested that his new proposed spending, if adopted by Congress, would be an investment that will pay for itself.

Mr. Obama declared: “We invest in reform that will bring down the cost of health care for families, businesses, and our government.” Such investments, he argued, will in the long run make the economy operate more efficiently.

Mr. Obama was optimistic about how his policy recommendations, if enacted, would play out.  But the nonpartisan Congressional Budget Office estimated that government spending and the deficit would grow steadily from 2012 through 2019, not only in dollars, but also as a percent of GDP.

After “bottoming out” at $658 billion in 2012—a level more than 40 percent above the highest deficit under the presidency of George W. Bush— CBO projects the deficit to reach $1.2 trillion in 2019, or 6 percent of GDP.  By 2019 government spending would take up nearly a quarter of GDP, far higher than at the peak of Iraq war spending, and the highest, except 2009 and 2010, since World War II.

Mr. Obama’s stimulus plan and budget are not one-time investments followed by years of reduced spending.  Instead, they form a platform for spending growth that continues into the indefinite future.  The vast majority of this spending is not what a well-run business or the Internal Revenue Service would count as investment—plant, equipment, and other tangible assets. Rather, most of the Obama spending would be for services.

Although Mr. Obama wants to spend and borrow more, a failed UK government’s bond auction earlier this week showed that investors are not always ready to finance the debt. And there are limits to how high taxes can rise before slowing an already fragile economy.

Alternatively, is it possible for Mr. Obama to cut spending?  Menus of changes in spending and taxes provided by CBO since 1978 suggest the answer is yes.  The latest complete volume of Budget Options was issued in February 2007, and another is due out soon.  A volume of health care options to both increase and decrease spending was published in December 2008.

CBO lists billions in savings in 10-year increments.  If only politicians had the willpower to choose among them, the budget might well be balanced. Let me assure readers that if only economists were elected to Congress, the deficit would shrink soon enough.  Of course, the economists might not be reelected.  But politicians try to woo different interest groups by spending money, with the ultimate cost falling on generations of taxpayers.

Here are a few examples of savings calculated by CBO, all over 10-year periods.

  • Social security benefits are now indexed for inflation using a formula based on wage levels rather than price levels.  Changing to a price index would result in a 10-year savings of $141 billion.  Gradually raising the standard retirement age, which will reach 67 in 2026, to allow for increased life expectancies would save another $86 billion.
  • Changing Medicaid payments for acute care services into block grants to states, and indexing these payments for price increases and changes in population, would save $556 billion.
  • CBO estimated that giving a voucher to purchase health insurance to every uninsured family within 200% of the poverty line—that’s below an income of $44,000 for a family of four—would cost $65 billion, a savings of $569 billion over the Obama plan, which calls for a down payment on a universal health insurance fund of $634 billion.  Double the generosity of the CBO voucher, and that’s still $500 billion less in spending than the president proposed.
  • Although Mr. Obama last year proposed creating a public health plan for uninsured Americans that looked like the Federal Employees Health Benefits Program, CBO calculated that replacing the FEHB with a voucher program would save $70 billion.

Other savings proposed by CBO range from $105 billion over ten years from reducing Federal aid to highways, to $13 billion from selling some Tennessee Valley Authority Electric Power assets, to $11 billion to eliminate Federal grants for wastewater and drinking water infrastructure, to savings from defense and agriculture.  All agencies are included.

In the name of investment, President Obama’s budget would increase the deficit by $4.8 trillion over the next decade.

He could serve us taxpayers better by carefully examining each line of spending and cutting the waste, as he promised us he would do during the campaign.

Click here to read a related opinion column, “To Pay for Vital Programs, Congress Must Make Tough Choices,” by Deborah Weinstein of the Coalition on Human Needs.

67 comments

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Free Market Capitalism is the unequal distribution of wealth. Socialism is the equal distribution of poverty. Take your pick. Robinhood was either a thief or a Defender of the poor and deprived.

Fairness screws the middle class in exchange for a few more services for the lives of the less fortunate or uninspired. We are beginning to trade percieved fairness for what once was well concieved guidelines for a balanced economic system. Now we have played out our sympathies by praying upon peoples emotions and chastizing who is potrayed as unsympathetic. As a whole we have been led to believe that big business is run by a bunch of crooks when in fact the government got us here.

This problem is neither Bush’s fault or Obama’s fault. This is our Governments fault. They have taken us here by dividing us. This whole economic crisis is an inside job. A trade went on here that brought the economy to its knees. I call it the War for Houses Tragedy. Why is it so difficult to understand. The world operates off of inverse relationships. It was the perfect strategy to drive the economy downward in exchange for quick amounts of unsubstantiated and unsustainable cash payouts.

The same guys who are putting together the budget are the same guys who took the money from AIG, defended Fannie Mae and Freddie Mac. Please stop blaming business. The forces who want their money demonize them so they can get public support. Look what they did to the AIG people who recieved the retention bonuses. First the government says it okay that AIG pay them and as soon as we find out they demonize them. Business people in particular industrialists are the most honest of all types. Far more honest than big government bureaucrats. That a fact!

Posted by tjohnson | Report as abusive

As I always say, “America gets what America wants!” America wanted change for changes sake and now they are going to choke on it.

Posted by Pal Adino | Report as abusive

TJ Johnson,

I agree with part of that but my biggest disagreement is pointing the finger at poor or uninspired people. The non-medical welfare budget is a fraction of the bailout budget which does nothing but help white-collared yuppies on Wall Street.

One of these days we’ll stop pointing the finger at the less fortunate who irresponsibly take enough to get by and start pointing the finger at the very fortunate robbing and printing money until we’re all deemed less fortunate.

Posted by Michael Ham | Report as abusive

@TJ

The irresponsible are to blame. Don’t have a job? Here is some money! Can’t pay your house loan? Here is some money!

There is a long list of benefits, assistance, etc. for those who do not contribute and they are rewarded for their irresponsibility while the rest of us have to pay.

I am all for helping someone out, but people are taking advantage of the system, and the system creates more irresponsible individuals. I pays big to do nothing in America.

I’m sick of you conservatives who are soooo afraid of change. Do you think we didn’t need change?! You just can’t find enough ligitimate reasons to jab at Obama.
You’re picky picky at all his ideas. Do you really think you could do a better job?
I’ve come to the conclusion you can not believe he’s as good as he is. You would
probably have a negative comment even if he helped you! Stop bitching and give him a chance!

Posted by Laura Andreson | Report as abusive

These are very sensible suggestions. There is nothing radical about them and they help the change in a better way. Why do liberals have to criticize anything that makes government more efficient. She is right on the money. I didn’t know what party she is from and who cares. Here ideas deserves serious consideration.

Posted by Mark | Report as abusive

by spending the government avoids the usa to go down even further. george bush squandered 1 trillion dollars to give it away to whom and for what? He should have laid the foundation for a top of the bill america. top infrastructure, top healthcare for everyone, affordable housing etc. In europe you pay maybe higher taxes but y have a pension, a healthcare system( for everyone and y are free to top of if y dnt like the basics), cars who run higher milage, gasoline prices high but nobody seems to drive one KM less. When the government balances it budget people know you can take but you have to give too..in holland the goverment increased the gasoline prices..they needed more money to pay for new programmes..people did not complain..they know if y want something y have to pay..btw what do you prefer a hihjer tax rate for which y get; basic healthcare, pension, good infrastructure or lower tax and y have to pay everyhting yourself? free choice but most of the time when your purse will be tightened what goes out first?
do the math of the net disposable income from the usa with a european country..you will be surprised..i did the same for hkg with 17pct tax rate versus holland..same earnings and in the end the same net disposable income.

Posted by hans olijve | Report as abusive