Morici: The Tragedy of the Budget Impasse

If the government shuts down, the Republicans will likely get the blame, but the American people will be the losers.

Federal finances are in a shambles and in need of radical overhaul. President Obama's budget ignores this; however, with a shutdown, he will be able to tar Republicans as ideologues, steal the initiative on spending and taxes, and leave his successor with a mess.

From 2007, the last full year before the financial crisis, to 2011, the second year of recovery, spending has jumped $1.1 trillion -- 40%. The President's budget plan would trim the deficit to $774 billion by 2022, but his projections have been rejected as too optimistic by private economists and political analysts of all stripes -- he assumes cost savings and new revenues from health-care reforms that are unlikely to materialize and a 4% economic growth through 2014, which few private economists endorse.

Most legitimate deficit reductions the President's budget accomplishes are through higher taxes on the wealthy, and a new interest and dividend tax that will likely drive business investment and personal wealth offshore.

Higher taxes are not the answer. In 2011, spending is projected at $3.8 trillion and revenues at $2.2 trillion. A 50% increase in all taxes and fees -- personal income, Social Security, Medicare, and corporate taxes, entry fees into national parks, and the like -- would leave the deficit at $560 billion. Even if phased in over several years, such a dramatic increase in taxes and fees would send the economy into a depression from which it would never recover.

Since 2007, only $200 billion would have been necessary to keep spending in line with inflation, but the Congress and President, in the name of temporary stimulus, permanently increased spending another $900 billion on entitlements -- notably on increased Medicaid benefits; industrial policies for electric trains, windmills and the like; and more regulators, such as to accomplish bank reforms that have not managed to restore lending to small businesses or end consumer credit car abuses.

Also since 2007, Social Security, like Medicare, began spending more than it takes in and is headed for insolvency, and skyrocketing costs for drugs, health insurance administration and malpractice are making both Medicaid and Medicare too expensive to continue in their present form.

Along with prudent streamlining and consolidation of regulatory and other discretionary programs, Social Security, Medicare and Medicaid must be radically altered.

Like an adolescent seeking an outsized allowance, Americans have been told these facts over and over again by journalists, economists and many moderate and conservative politicians. And President Obama has boosted his reelection prospects by telling Americans it isn't so; instead, he says soaking Americans earning over $250,000 will solve all their problems. He is not leveling with voters!

Republicans have tabled a plan for budget reform. Solutions for Social Security are absent and suggestions for Medicaid and Medicare are irresponsible. Republicans recommend vouchers for seniors and block grants to the states to finance Medicare that merely would shift the burden of a broken system onto the elderly and governors. At least open discussion of this plan would focus Americans on the need for real reform.

The Social Security retirement age must be raised, now, to 70 for all Americans under 55, and the federal government must more earnestly regulate drug prices and health insurance administrative costs and curb malpractice cases.

The private health-care system is monopolized, and is less efficient than private, but better regulated, systems abroad. Specifically, Americans pay 18%  of GDP for health care, while the Germans and Dutch pay only 12% to accomplish outcomes as good or better.

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

Comically, President Obama, through his surrogates in the Senate, and the House Republicans are now scrabbling over about $40 billion in cuts from 2011 spending and that comes to less than 1% of federal spending and 3 of the deficit.

If the budget impasse causes the government to shut down, the President will use his superior rhetorical skill to paint Republicans as irresponsible. Voters, not wanting to face up to the insolvency of Social Security, Medicare and their government overall, will believe him.

Nero fiddled while Rome burned but at least the citizens were outraged. In contemporary America, the President conducts an orchestra of equally irresponsible citizens.

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