Morici: President Obama and Republicans Duck the Tough Problems

President Obama’s State of the Union address and Representative Paul Ryan’s Republican response offered few new ideas and weren’t forthright about what needs to be done to get America thriving again.

The November elections plainly established voters want less government and a focus on jobs, and they don’t believe Americans have to choose between the two.

President Obama proposed freezing domestic discretionary spending to reduce the deficit by $400 billion over ten year, but he offered no substantive changes to Medicaid, Medicare, Social Security and other entitlements. That simply doesn’t cut it.

In 2007, the year before the recession, government spending was $2.7 trillion—less than 20 percent of GDP—and the deficit was a manageable $161 billion. In 2011, with the economy recovered, spending will top $3.8 trillion—more than 25 percent of GDP—and the deficit will be about $1.4 trillion

Simply, the Democrats took control of the Congress in 2007 and used the recession as cover to permanently increase spending on the regulatory bureaucracy, entitlements and industrial policies by $1.1 trillion, and the leading edge of the Baby Boomers has begun to tax the Social Security and Medicare trust funds.

Now, the President proposes to address about forty percent of the gap over the next decade. Essentially, he is laying a trap—daring Republicans to solve runaway health care costs and Social Security, knowing how Americans react to the bearers of bad news.

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Barack Obama

Republicans would deserve some sympathy if they were not so foolish in what they propose. Congressman Ryan suggests tax credits and giving vouchers for Medicaid recipients to purchase insurance and medical services. Those merely repackage and expand health care spending accounts and repeat the worst mistakes of the Democrats health care reform.

By subsidizing insurance for the working poor and unemployed, and imposing mandates on employers, the new health care law increases demand, drives up prices and makes health care even less affordable for the rest of us. The new health care law raises the budget deficit, not lowers it as the President claims, because his estimates rely heavily on cuts in Medicare payments to doctors the Congress has repeatedly declined to implement.

Millions of working poor and unemployed armed with vouchers, as Mr. Ryan proposes, would have less bargaining leverage than the government when buying health care services and end up paying even higher prices. The budget deficit would rise to pay those costs, or the least advantaged Americans would get less care, become less healthy and impose even greater burdens on society.

Europeans, through varying forms of private insurance and single payer public systems, spend about 12 percent of GDP on health care and provide decent coverage for all their citizens. The United States spends 18 percent and gets much less satisfactory results.

Simply, Europeans recognize a private, adequately competitive market in health care is not possible and regulate prices for drugs, hospital stays and administrative overhead—Republicans simply won’t accept those facts. In the United States, health care prices are pushed through the roof by savvy providers who know how to manipulate Washington even better than Wall Street—Democrats live a fantasy about curbing those abuses.

On Social Security, neither side is willing to ask Americans to be grownups about the facts. When the system was established, life expectancy was 64 and the retirement age was set at 65, whereas today life expectancy is 78 and the retirement age will rise to 67 in 2027 under current law.

Privatizing a portion of social security, as Mr. Ryan suggests, can’t change what is required of Americans—the retirement age must be pushed up to 70, now, to have a viable system. And most folks left to manage stock market portfolios will end up with even smaller pensions than an actuarially sound Social Security system could provide.

Lots need to be fixed to create jobs. Americans must produce more and use less energy to slash oil import costs, and the President needs to take substantive actions to offset the effects of China’s undervalued currency and level the playing field for U.S. manufacturers.

Even with those tough problems addressed, Americans still won’t be able to compete for jobs with the Chinese and other emerging powers in Asia if Washington refuses to tackle the burdens created by health care and retirement systems that push costs through the roof, whether paid for through burdensome taxes or employer mandates.

Investments in education, high-speed rail and R&D the President recommends won’t be worth much without tackling those tough problems.

Neither the President nor the Republicans have demonstrated the wisdom and courage to do what needs to be done.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.