The Guest Blog

Morici: President, Tea Party Win Big, National Interest Be Damned

In the debt ceiling melodrama, the President and Tea Party each had political objectives and national interests to serve. Politics won out.

At the outset, the President demanded something his predecessors have not enjoyed—a debt ceiling increase large enough to see him through two years and his reelection campaign, and a greater measure of tax fairness.

With a Republican majority in the House, the President could only hope to achieve one of his goals. The final deal could have attracted centrist majorities in the House and Senate to close tax loopholes enjoyed by big corporations and wealthy Americans, but alas, the President picked his hide.

He will get his furlough from debt ceiling politics until after the 2012 election, and tax justice can wait.

The Tea Party had a choice too—entitlement reforms at the price of closing tax loopholes and a fairer tax structure to generate more revenue. Instead, that caucus, on July 23, balked at a landmark deal crafted by Speaker Boehner and President Obama that would have addressed both entitlements and the tax fairness.

That mega-deal would have changed the course of budget politics for the better for a decade but instead Tea Party Congressmen bowed to their base instincts. Now, they can boast to constituents they won spending cuts without succumbing to Democrats’ pleas for higher taxes.

Nowhere, did I hear the politicians—of either stripe—address the genuine nature of the deficit problem. The American private sector may be the most efficient on the planet, but the U.S. federal government is woefully uncompetitive.

Compared to other large prosperous democracies, like Germany and Japan, Americans have reasonable expectations of their federal government—effective law enforcement, protection from abusive business practices, a well functioning infrastructure to support commerce, a reasonable measure of income security in these uncertain times, a minimum standard of health care for all citizens, and a dignified retirement.

The problem Americans face is that they pay so much more than citizens in other countries to get comparable benefits—hence, Washington has budget deficits that no amount of tax increases can erase.

Over the last four years, federal spending has swelled an additional $1.1 trillion, when inflation required only $200 billion, and the budget deficit jumped ten-fold to $1.6 trillion. Consequently, now the federal government simply costs more than the economy can bear.

To point: increasing everyone’s taxes 50 percent would still leave an annual deficit of nearly $1 trillion.

The deficit reduction compromise reached by the President and Congressional Republicans makes spending cuts of about $900 billion over ten years ($90 billion a year) across all areas of government except the two areas creating the biggest problems—Social Security and accelerating Medicare and Medicaid costs. The deal establishes yet another blue ribbon panel of senators and representatives to find another $1.5 trillion ($150 billion a year), mostly in those two problem areas.

If successful, the federal government would still be left with annual deficits much greater than $1 trillion a year—more than increased taxes can erase and certainly big enough to ensure a downgrade by credit rating agencies.

The panel will play some quick tricks with Social Security, like lowering the inflation formula, even though the current formula shorts grandma on annual adjustments to Social Security.

The panel will shift some health care costs onto the states, employers and the well-to-do elderly. That only will accelerate health care price increases by expanding the market drug companies—and other health care monopolists—can bludgeon.

Social Security will never be fixed until President Obama steps up to the podium, stops denying the retirement programs’ impact on future budgets, and tells Americans, “we are living longer so we will have to work longer, otherwise the system will go bust and not be there for our kids.”

Don’t hold your breath waiting for that act of courage.

Americans spend 19 percent of GDP on health care, while the Germans and Dutch, with private systems and similar outcomes to the United States, spend 12 percent. Americans can’t hope to compete and create jobs if businesses must pay so much more in premiums and taxes to finance employee health care benefits.

The difference between the U.S. and those European systems—Europeans better manage the drug patent system, don’t let drug company and insurance company executives skim enough health care dollars to live like pre-revolutionary French aristocrats, and don’t let hospitals overstaff with the marginal competent clerks, technicians and overspecialized professionals—you have to spend a few days in one of those places to fully comprehend.

This week the President and the Tea Party got their victories but Americans will remain besieged by slow growth, high unemployment, stagnant wages, and a government too expensive for its citizens to bear.

It reminds a lot of the old Soviet Union—which if you will remember, quit the business of governing when it ran out of money.

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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.