Analysis/Comment Dr. Peter Morici: Getting serious about reducing US federal deficit; Gas prices, consumers and the economy
By Professor Peter Morici
Apr 13, 2011 - 1:25 AM
President Barack Obama returns to the Oval Office through the Rose Garden after surprising students from Altona Middle School in Longmont, Colorado, April 11, 2011. During his statement Friday night, President Obama mentioned a letter he received from the mother of an Altona student who worried that her son's trip to Washington, DC, would be canceled if there was a government shutdown.
Dr. Peter Morici: Getting serious about reducing
the US federal deficit; President Obama and Congressional Republicans are
tabling proposals to balance the budget, and Americans have a right to be
skeptical. Separately, an analysis on the implications of rising gas prices for
consumers and the economy, is also presented.
Since 2007, spending has increased $1.1trn and the deficit has jumped from
$161bn to $1.6trn. The President’s February budget projects the deficit will
fall to $772bn by 2022. However, that forecast is dubious, because it assumes 4%
growth over the next four years, which few economists would endorse, and cuts in
Medicare payments to physicians and hospitals, few political observers believe
will materialize. More likely, deficits will exceed $1trn, or even $1.5trn, for
many years to come.
The President will propose higher taxes on the wealthy and plugging some
corporate tax loopholes but that simply won’t do it. His budget already assumes
repeal of the Bush tax cuts for those earning over $250,000. Even raising income
taxes by 50% on all families earning more than $200,000 would not yield much
more than $250bn a year. The resulting capital flight would reduce taxable
income, and job losses would drive up federal social spending—net deficit
reduction would not be large.
Although some loopholes could be plugged, moderate Democrats and Republicans
agree US corporate taxes are too high for American companies to be competitive.
Most revenue that might be found fixing abuses will eventually have to be put
into lower corporate taxes for those firms bearing more than their fair share of
At the core of the fiscal mess are the rapidly growing bills for Medicaid and
Medicare, and Social Security.
On health care, the fundamental problem is that federal and state governments
pay 55 cents of every dollar spent on health care. A private market for health
care no longer exists, and government reimbursements set most prices for health
Germany and Holland, like the United States, have systems of private insurers.
In those countries, although government reimbursements account for nearly 80% of
payments, health care costs are half of what Americans pay.
Those 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
A solution requires 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 the deficit.
The Republican plan—Congressman Paul 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 paying too much for health care services onto state budgets and the
backs of the elderly.
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 US
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 will know they are serious. Until then, it would be
great drama but for the fact we are saddling our children with an unbearable
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Gas Prices, Consumers and the Economy
Gasoline prices are soaring passed $4.00 a gallon in many places and driving
will continue to be more expensive. Unless consumers are determined to again
recklessly pile up credit card debt, higher gas prices will profoundly slow
other purchases and the economic recovery.
Over a three year period, most folks don’t have much control over how much they
spend on rent and mortgage payments, utilities, tuition, and food, or how much
they drive. Gasoline absorbs 15% or more of most household budgets, and the
necessity of getting to work and driving kids to soccer practice does not relent
when gas prices jump.
With gas prices up from $2.75 a gallon since last September, higher prices
translate into a 5% cut in discretionary income, and Americans will be eating
fewer restaurant meals, wearing fewer new clothes, curtailing summer vacation
plans, and postponing furniture purchases and home improvements.
As most money paid for higher priced gasoline leaves the country to pay for more
expensive imported oil and does not return to buy US exports, this shift in
consumer spending reduces demand for what Americans make and slows economic
GDP was up 3.1% in the fourth quarter of 2010 and employers are hiring
again—unemployment may not be as low as we would like but it is coming down. But
for the first quarter of 2011, economic forecasters have lowered estimated
growth to 2.7% from 3.4% just a month ago, and if growth stays that subdued,
50,000 or more jobs will be lost each month on account of higher energy prices.
Gasoline prices are likely to continue rising, and the impact on jobs creation
and unemployment will worsen. China continues to grow at 9 or 10% a year, and
Beijing regulates gasoline prices and subsidizes oil imports to meet growing
domestic needs. This pushes the impact of tight global oil supplies and Middle
East disturbances onto the United States and other big importers.
Oil prices could easily stay above $125 a barrel and gasoline prices could
pierce $4.50 a gallon before moderating this summer or fall. That would further
slow growth to about 2% and kill most jobs creation.
Growth at less than 2.5% is difficult to sustain. At less than 2.5% growth, most
businesses can meet new demand by raising productivity, hiring slows or stops in
most industries, and layoffs accelerate in slower growing sectors—pessimism
grows, retail sales slow and the conditions for a new recession emerge.
US policy has been to discourage domestic drilling for oil and gas and bank on
alternative energy—such as solar, wind and nuclear. Events in Japan make nuclear
power a much less likely option than three months ago, and fully electric
vehicles that could exploit more abundant electricity from alternative sources
are at least ten years away from having any significant impact on US gasoline
Freeing up drilling for domestic oil and gas, greater emphasis on natural gas
use for urban fleets, and more rapid build out of high-efficiency gas powered
cars, hybrids and plug in hybrids would do a great deal to rev up the US
economy, create jobs and reduce the grip of foreign oil.
Higher gasoline prices are always painful, but if more of the gasoline purchased
were refined from domestic oil and more resources were focused on reducing
domestic gasoline use altogether, the money spent would stay in the United
States to create jobs. American prosperity would be much less vulnerable to
events in the Middle East, Africa and other unstable places around the globe.
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Professor, Robert H. Smith School of Business, University of Maryland,