Morici: The Budget Follies

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

The President’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4 percent growth assumed by the President’s budget for the next four years proves Pollyanna.

Time and again, House Democratic Leader Nancy Pelosi and President Barack Obama have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

To set the record straight, in 2007, the year before the financial crisis, with wars in Afghanistan and Iraq at full tilt and Bush tax cuts in place, the federal deficit was only $161 billion. In 2011, with the economy in its second year of recovery and TARP money returning to the Treasury, the deficit is ten times larger and greater than $1.4 trillion notched in 2009, the pit of the recession.

Neither Bush’s wars and tax cuts, nor the recession caused the 2011 mess.

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After Nancy Pelosi became speaker in 2007 and Barack Obama became president in 2009, annual federal spending jumped $1.1 trillion—40 percent—thanks to additional spending on Medicaid, Medicare and other forms of income redistribution; fanciful industrial policies for electric trains, windmills and the like; and more regulators to shut down domestic oil and gas production, limit bank lending to small businesses and affluent home buyers; and pretend to curb abusive Wall Street trading and salaries.

To keep pace with inflation, federal spending would have to had grown $200 billion from 2007 to 20011, and this economist scratches his head to ask: How are ordinary Americans better off for the additional $900 billion in federal spending?

Enter those tough-minded House Republicans, who propose to cut spending much less than half of $900 billion in 2012 and only $4 trillion, cumulatively, over the next decade.

It’s the same old story, when the Democrats get the reins they increase spending by a dollar, and when the Republicans seize back control they can manage to slice the excess by 50 cents.

What is more comical are the means the GOP present for restoring fiscal sanity.

Health care costs are running away in the United States—Americans pay 18 percent of GDP for health care, while the Germans and Dutch pay only 12 percent to accomplish outcomes as good or better.

Americans simply pay much more for drugs, health insurance administration and mal-practice than do the Europeans, but each interest group has enough Congressmen or a President in their vest pocket to keep real reform at bay.

Now, Republican wunderkind and House Budget Chairman Paul Ryan proposes block grants to the states to cut Medicaid spending, and vouchers for poor folks so they can negotiate better prices for doctors visits, hospital stays and drugs.

Absolute sophistry!

It is incomprehensible that poor folks can do a better job of negotiating with drug and insurance companies than the federal government and block grants will merely shift the burden of the overspending and cutting from Washington to the states.

I love those brave Republican Congressmen—no guts to stand up to special interests, so put it on the backs of the poor and state legislatures.

On Social Security, the Republicans promise savings but don’t say too much about how. They simply won’t get behind what is needed—raising the retirement age to 70 for everyone under 55.

Congressman Ryan likes private investment accounts, but those would have yielded zero invested in U.S. equities over the last decade. His solution: the federal government should guarantee returns on private accounts. The economics is complex but that is essentially what social security does right now on public custodial accounts, but because people are living longer and the economy is not growing rapidly enough, social security is a festering crisis.

Republicans need two things to lead. First, the courage that Barack Obama lacks on health care and Social Security to regulate drug prices, insurance overhead and torts, and level with Americans about the need to raise the retirement age.

Second, replace Mr. Ryan. Like Mr. Obama, he sounds good but does not have much useful to say.

Americans really need adults to govern but few can be found on either side of Pennsylvania Avenue.

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.