President Barack Obama
took office promising to lead from the center and solve big problems. He has
exerted enormous political energy attempting to reform the nation's health-care
system. But the biggest economic problem facing the nation is not health care.
It's the deficit. Recently, the White House signaled that it will get serious
about reducing the deficit next year—after it locks into place massive new
health-care entitlements. This is a recipe for disaster, as it will create a
new appetite for increased spending and yet another powerful interest group to
oppose deficit-reduction measures.
Our fiscal situation has
deteriorated rapidly in just the past few years. The federal government ran a
2009 deficit of $1.4 trillion—the highest since World War II—as spending
reached nearly 25% of GDP and total revenues fell below 15% of GDP. Shortfalls
like these have not been seen in more than 50 years.
Going forward, there is
no relief in sight, as spending far outpaces revenues and the federal budget is
projected to be in enormous deficit every year. Our national debt is projected
to stand at $17.1 trillion 10 years from now, or over $50,000 per American. By
2019, according to the Congressional Budget Office's (CBO) analysis of the
president's budget, the budget deficit will still be roughly $1 trillion, even
though the economic situation will have improved and revenues will be above
historical norms.
The planned deficits
will have destructive consequences for both fairness and economic growth. They
will force upon our children and grandchildren the bill for our
overconsumption. Federal deficits will crowd out domestic investment in
physical capital, human capital, and technologies that increase potential GDP
and the standard of living. Financing deficits could crowd out exports and harm
our international competitiveness, as we can already see happening with the
large borrowing we are doing from competitors like China.
At what point, some
financial analysts ask, do rating agencies downgrade the United States? When do
lenders price additional risk to federal borrowing, leading to a damaging spike
in interest rates? How quickly will international investors flee the dollar for
a new reserve currency? And how will the resulting higher interest rates,
diminished dollar, higher inflation, and economic distress manifest itself?
Given the president's recent reception in China—friendly but fruitless—these
answers may come sooner than any of us would like.
Mr. Obama and his
advisers say they understand these concerns, but the administration's policy
choices are the equivalent of steering the economy toward an iceberg. Perhaps
the most vivid example of sending the wrong message to international capital
markets are the health-care reform bills—one that passed the House earlier this
month and another under consideration in the Senate. Whatever their good
intentions, they have too many flaws to be defensible.
First and foremost,
neither bends the health-cost curve downward. The CBO found that the House bill
fails to reduce the pace of health-care spending growth. An audit of the bill
by Richard Foster, chief actuary for the Centers for Medicare and Medicaid
Services, found that the pace of national health-care spending will increase
by 2.1% over 10 years, or by about $750 billion. Senate Majority Leader Harry
Reid's bill grows just as fast as the House version. In this way, the bills
betray the basic promise of health-care reform: providing quality care at lower
cost.
Second, each bill sets
up a new entitlement program that grows at 8% annually as far as the eye can
see—faster than the economy will grow, faster than tax revenues will grow, and
just as fast as the already-broken Medicare and Medicaid programs. They also
create a second new entitlement program, a federally run, long-term-care
insurance plan.
Finally, the bills are
fiscally dishonest, using every budget gimmick and trick in the book: Leave out
inconvenient spending, back-load spending to disguise the true scale,
front-load tax revenues, let inflation push up tax revenues, promise spending
cuts to doctors and hospitals that have no record of materializing, and so on.
If there really are
savings to be found in Medicare, those savings should be directed toward
deficit reduction and preserving Medicare, not to financing huge new
entitlement programs. Getting long-term budgets under control is hard enough
today. The job will be nearly impossible with a slew of new entitlements in
place.
In short, any
combination of what is moving through Congress is economically dangerous and
invites the rapid acceleration of a debt crisis. It is a dramatic statement to
financial markets that the federal government does not understand that it must
get its fiscal house in order.
What to do? The best
option would be for the president to halt Congress's rush to fiscal suicide,
and refocus on slowing the dangerous growth in Social Security, Medicare and
Medicaid. He should call on Congress to pass a comprehensive reform of our
income and payroll tax systems that would generate revenue sufficient to fund
its spending desires in a pro-growth and fair fashion.
Reducing entitlement
spending and closing tax loopholes to create a fairer tax system with more
balanced revenues is politically difficult and requires sacrifice. But we will
avert a potentially devastating credit crisis, increase national savings, drive
productivity and wage growth, and enhance our international competitiveness.
The time to worry about
the deficit is not next year, but now. There is no time to waste.
Mr. Holtz-Eakin is
former director of the Congressional Budget Office and a fellow at the
Manhattan Institute. This is adapted from testimony he gave before the Senate
Committee on the Budget on Nov. 10.