January 31, 2011

Obama to Debt and Deficit Reduction Commission: So Long, It’s Been Good To Know You

by Hal Gershowitz

Comments Below

We, like many others, hoped for more from the State of the Union Address.  We thought that, just maybe, President Obama might lead for a change, and signal a Clintonian tack to the center, with a strong pro-growth message and a pledge that the White House was ready to work with the Congress on top-to-bottom entitlement reform.  He simply didn’t. In fact, he largely gutted his own Debt and Deficit Reduction Commission’s recommendations.

Last week’s essay anticipated that this might be the case by noting that the President had only “talked-the-talk” on deficit spending and debt reduction but had not yet “walked-the-walk”.  The State of the Union address made it clear that he has barely taken the first step on what will be a very long walk.

We received many emails and comments regarding last week’s essay, “The End of the Era of Tax, Overspend, Then Borrow The Difference.”  Some lamented that political rhetoric about reducing spending is just that… rhetoric. One commenter chided the new Congress (and, perhaps, us too) writing:

“We do need draconian cuts in all areas of spending. Let’s start with Defense. Correct me if I missed something but so far, the new congress has done little but mouth platitudes and the same general babble about “big guvmnt” without offering one specific. I watched Eric Cantor from Virginia on meet the press and he was an embarrassment in his responses when asked to offer some concrete proposals. He kept repeating that “everything is on the table” yet refused to be pinned down as to what the remedies for our fiscal bad health might be. 
 O.K. the Republicans have the chance. Tell the President what they think we need to do. We are all listening.”

While we do not take issue with Representative Cantor’s comment that “everything is on the table,” we strongly agree with the commenter that the time for generalities is over and that the time to get down to specifics is now upon us. Time will, soon enough, tell whether “platitudes and general babble” will be the currency of the new Congress.  But let’s not, as the commenter suggests, start our cutting with Defense (we’ll get there soon enough). Let’s start cutting with the “A’s” (Administration for Children and Families is the first alphabetically itemized agency) and then work our way through the rest of the alphabet. Let’s go all the way through the W’s (“Woodrow Wilson International Center for Scholars – the last funded program in the alphabetical listing of federal agencies and departments).

All in all, we count about 750 agencies and departments, and when we consider the various offices and programs within these agencies that feed at the public trough, the list of funded entities runs into the thousands.  So, as Representative Cantor said, let’s put everything on the table. Some agencies and departments will justify keeping all or most of their funding and some may lose all of their funding. Our point is that a frequent, if not annual, review of all of these bureaucratic crevasses, nooks and crannies that are now, collectively, home to $3.4 trillion dollars (and growing) wrung from the nation’s taxpayers is the only way we will achieve real balance between what the nation spends and what it can afford to spend.  Calling for a five- year freeze on non-discretionary spending, as the President did in his State of the Union address merely locks in the breathtaking growth in spending of the recent past.  As an answer to the budget crisis, the President’s call for a freeze in spending was less than weak; it amounts to little more than camouflage to mislead the electorate into believing that his Administration is serious about controlling spending.

Unquestionably, future Social Security benefits and Medicare funding will have to be addressed.  Medicare premiums will have to be substantially increased or Medicare benefits will have to be substantially reduced.  Probably, a combination of the two alternatives will be required.  Everything else, Defense, Labor, Justice, Commerce, etc., pales when compared to the unfunded liabilities inherent in our Social Security and Medicare programs.

This week we learned that Social Security is, essentially, insolvent and that it will run deficits every year for the rest of the fund’s life. Retirees previously had been assured by the Congressional Budget Office that while the Social Security fund had been in the red for the last two years, it would shortly return to surplus.  But last December the Obama administration approved a reduction in Social Security contributions—lowering the Social Security tax from 6.2 to 4.2 percent – good short-term politics but bad policy. Presto!  The Social Security deficit skyrocketed from $45 billion to $130 billion. And it now seems the so-called trust fund will run completely dry sometime in 2037. Thus, it seems we’ll have to further increase our borrowing to continue funding Social Security.

And if things weren’t bad enough, The Congressional Budget Office announced last week that the estimated size of the current year fiscal deficit had been understated and that we would find ourselves in the hole this year by $1.5 trillion, up from $1.3 trillion last year and $1.4 trillion the year before.

So where to begin getting things under control? It will be up to the Congress to do the heavy lifting, and the political downside will be significant without presidential support and cooperation, if not leadership.  The President clearly signaled that reducing spending will not be part of his agenda (freezing costs isn’t reducing spending) nor will his agenda include very much of the Debt Reduction Commission’s recommendations regarding tax reform…quite the contrary.

Let’s look at the core recommendations of the Debt and Deficit Reduction Commission and how those recommendations were gutted in the President’s State of the Union Address.

A key recommendation of the commission, clearly intended to foster long-term economic growth, was a simplification of the tax code, reductions in tax rates for all tax payers, treating capital gains and dividend income as ordinary income, and the elimination of itemized deductions and many sacred-cow subsidies, credits and other corporate tax incentives.  The president, hardly giving a nod to his Debt and Deficit Reduction Commission, merely reiterated his politically safe opposition to maintaining the Bush tax reductions for millionaires (strangely defined as anyone earning over $200,000 – or families earning over $250,000).

The president’s Debt and Deficit Reduction Commission also recommended establishing firm ratios of allowable Debt to GDP and Taxes to GDP, a sensible way of keeping America from spending and taxing itself into European-type economic extremis.  Not a word from the President, other than a sentence about lowering tax rates for business, on any of these key recommendations, all of which would be anathema to his far left base.

PayGo, which was supposed to require that all new spending be coupled with increased taxes or reduced spending to offset any new expenditures has been a failure because Congress simply ignores it when its appetite to spend is greater than its discipline to restrain spending. Perhaps it’s time to dust off old zero-based budgeting plans and reconsider a realistic, but modified approach to zero-based budgeting.  Under a zero-based budgeting regime (quite common in the private sector) every agency and department would have to build its budget from a zero base each year, eliminating (or reducing) every unproductive, inefficient or duplicative expenditure.  A government zero-based budgeting process would, admittedly, be very time consuming, labor intensive and cumbersome.  However, a modified zero-based budgeting process just might work.  Under a modified zero-based budget plan, managers would be charged with the responsibility of on-going evaluation of their agency or department’s productivity and identifying those operations that can be reduced or eliminated. Perhaps every three years or five years, every agency’s budget would be adjusted consistent with these rolling assessments of productivity.

Efficient and cost-effective budgeting requires a cost conscious governing culture that sees itself as the steward of the public’s funds.  When elected officials sitting in Washington and various state capitals have the power to extract and transfer funds from the peoples’ accounts to the government’s account, they have an enormous responsibility to use that power thoughtfully and, always, in the interest of the people who sent them to govern. Frankly, this White House is either tone deaf, or, more likely, intentionally ignoring the message that was delivered in the November 2010 election. Behind all of the flourishes, there still exists only an agenda of spend, tax and borrow the difference.

All comments regarding these essays, whether they express agreement, disagreement, or an alternate view, are appreciated and welcome. Comments that do not pertain to the subject of the essay or which are ad hominem references to other commenters are not acceptable and will be deleted.

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4 responses to “Obama to Debt and Deficit Reduction Commission: So Long, It’s Been Good To Know You”

  1. irwin yablans says:

    The white house may or may not be tone deaf.To say “that they are ignoring the message that was delivered in the november election” is misleading. The republican majority that has made thrift and fiscal responsibility their battlecry has yet to suggest one example. it is easy to be nonresponsive when there nothing is heard. The congress needs to act bravely and decisively in advising the president.
    It is unfair to to suggest that President Obama is intentionally ignoring a message….what message and from whom?

    • We disagree. The President’s State of the Union Message was, in fact, devoid of any substantive response to the “shellacking” (his word) he and the democrats took in the November 2010 elections. While we agree that the time is upon us for specific deficit reduction recommendations to be presented by the Congress, it is a new Congress that has only been in session for less than a month. Sensible recommendations will evolve from a process that is just getting underway. Nonetheless, we expect specific recommendations to be forthcoming and will share Mr. Yablans consternation if they do not soon materialize.

  2. irwin yablans says:

    I like the A to Z approach you used as an illustration.
    It is actually a very practical idea and would be very revealing to the ordinary citizen. It would still leave the more serious problems ,social security,medicare…. but it could begin the process and possibly change the present culture of do nothing.

  3. Keith Wilson says:

    Over two trillion in assets (treasury bonds earning interest), yet you claim that Social Security is insolvent? The definition of insolvent is having insufficient assets to meet debts and liabilities. In what universe are you living? Unfunded liabilities are what many company’s pension plans as well as state pension plans for public employees are – no funds were set aside for many of them. Social Security has funds (over two trillion, remember?) and will not run out of assets until, as you pointed out, 2037. That is 26 years from now! After that, payroll taxes will still cover 4/5 of benefits through 2084 (73 years from now). If you raise the cap at which social security taxes are taken out of income, you fund social security for generations. Social Security is not an entitlement, it is an earned benefit, paid for by payroll taxes.

    The one-year deal to lower collected payroll taxes by 2% does not affect the trust fund because that shortfall is made up for out of general revenues. That is what Obama never should have agreed to, and that is what should be objected to.

    Would you like old folks to go to poorhouses instead (read up on how it was before Social Security)? Would you like Social Security dissolved and for people to have to use private financing of their retirement? Wouldn’t Wall Street like that? Oh, by the way, disabled need not apply. Oops, sorry, we had everything of yours invested with Bernie Maddoff; go live with your cousin in his one bedroom apartment. Oh, sorry, your financial advisor is in South America with your retirement. Can’t manage to keep funds in your retirement account? Work until you drop dead. Or go live with your conservative children rent-free.

    Repeat: Social Security is not an entitlement. Social Security is solvent. Social Security has almost eliminated poverty among seniors. Social Security works. Get the facts.

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