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Morici: Deficit Drama Will Continue in 2012 and Beyond

Friday, 22 Jul 2011 | 9:34 AM ET

By August 2, the Congress and President will likely come up with a patchwork plan to cut spending and increase revenue over the next ten years, the debt-ceiling will be raised, and Armageddon will be averted-but only for a brief period.

Angst will begin anew next February when the President publishes his 2013 Budget, and bond rating agencies see quite plainly the United States does not have a credible plan to bring its growing debt under control.

Budget compromises now being discussed will pare back discretionary spending-something that can't be done very much a second time-and trim Medicare and Medicaid benefits. However, a few hundred billion a year in cuts won't change budget fundamentals.

Health care costs are too high and Americans are living longer. The cost of health care and Social Security benefits the federal government remains committed to providing will continue to grow faster than the economy and federal revenues-even if the President gets higher taxes on millionaires.

This situation is especially compelling now that Treasury Secretary Geithner tells us economic growth is likely to be closer to its current 2 percent rate than the 4 percent assumed by President Obama in his February 2011 budget and necessary to pull down unemployment to acceptable levels within a few years.

Since 2007, the deficit has swelled from $161 billion to about $1.6 trillion. Even with a few hundred billion annually in reduced spending and some new revenues, deficits in excess of $1 trillion each year can be expected indefinitely. Those projections will compel bond rating agencies to cut the U.S. credit rating from AAA, driving up borrowing costs for the federal and state governments, home buyers and private business. More spending cuts and taxes will be required to accommodate higher interest payments, and economic growth will slow even further.

Stethescope and money
Stethescope and money

On health care, the fundamental problem is that federal and state governments pay 55 cents of every dollar spent on health care; hence, a private market for health care no longer exists, and government reimbursements set most prices for health care services.

Germany and Holland, like the United States, have systems of private insurers. In those countries, although government reimbursements account for nearly 80 percent of payments, health care costs are half of what Americans pay. For example, Germans spend $400 per capita on prescription drugs, whereas Americans pay $800.

European governments keep costs down by better regulating prices, but in the United States drug manufacturers, health insurance companies and hospitals each have enough influence with the Congress or the President to keep real reform from happening.

Solutions require significantly lower prices for drugs and many health care services, and the President's health care law doesn't provide for those-witness the jump in cost of drugs, health insurance premiums and the like in 2011. Now the President is boxed in by past actions to defend a policy that adds additional subsidies to a broken system and increases health care prices and the deficit.

The Republican approaches-for example, Congressman Tim Ryan's Path to Prosperity-would replace federal Medicaid with block grants to the states and Medicare with vouchers to seniors to buy private insurance, but those tactics would merely shift the problem of prices too high for health care services onto state budgets and the backs of the elderly and the poor.

Also, Europeans don't have the additional burden of abusive malpractice suits but tort lawyers have among their ranks too many prominent contributors to the Democratic Party for any solution to be possible there.

On Social Security, the basic problems are that Americans are living much longer and retiring long before their health requires, and the ratio of retirees to working age Americans is too high and rising. Higher taxes would cripple U.S. international competitiveness with rising Asian economies, and individual retirement accounts risk leaving many elderly without adequate support, especially if they live past 75.

Simply, the retirement age needs to be raised to 70 for Americans under the age of 55. Only that solves the problem and other solutions are unworkable.

When Democrats and Republicans are willing to start seriously regulating prices for health services, and embrace a substantial and immediate increase in the retirement age, Americans and bond rating agencies will know they are serious deficit reduction. Until then, posturing in Washington provides great drama but we are saddling our children with an unbearable debt.

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.

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