US Economy Dr. Peter Morici: Budget demagoguery; White House says deficit in current year to spike to $1.65trn - - the largest dollar amount ever
By Professor Peter Morici
Feb 14, 2011 - 3:09 PM
On a White House White Board, Jack Lew, Director of the Office of Management and Budget, explains how the President's Budget will help then government live within its means, while still investing in America's future.
The White House
projected Monday that the federal deficit would
spike to $1.65trn in the current fiscal year, which
ends on Sept 30th next - - the largest dollar amount
President Obama is proposing $3.73trn in spending in
the next fiscal year and a mix of tax and spending
cuts that are expected to cut the federal deficit
over 10 years.
The deficit is
forecast to fall in fiscal year 2012 to $1.1trn, or
7% of GDP (gross domestic product) as a year-long
payroll tax holiday and an extension of federal
jobless benefits expire. By 2017,
the budget plan says, the deficit would cut to
$627bn, or 3% of GDP.
Dr. Peter Morici: Budget demagoguery; The annual
exercise in obfuscation begins—the President has tabled his 2012 budget and the
Congressional Republicans are responding. Neither party is serious about cutting
The president’s budget document shows a $1.6trn deficit for 2011, and serves up new
“investments” in education, transportation and R&D, while offering to slice less
than $100bn mostly from domestic discretionary spending.
House Republicans, for their part, are squabbling among themselves about cuts in
the same range, as both sides really focus on only 15% of the
budget—discretionary spending, excluding security and defense.
Democrats will stubbornly argue the economic recovery will collapse if the
deficit is cut by any more than $100bn, and Republicans will offer to privatize
Medicaid and Medicare, as if vouchers and private spending accounts will help
the nation’s poor and elderly obtain lower drug and hospital rates than can the
The Tea Party’s denials notwithstanding—the failure of both sides to offer
meaningful proposals to cut federal health care spending and Social Security are
setting up Americans for a giant tax increase that will kill US competitiveness,
and damn the nation to Euro-style slow growth and high unemployment.
In 2007, the year before the recession, with Bush tax cuts in place and wars in
Afghanistan and Iraq at full tilt, government spending and the deficit were was
19.6% of GDP and $161bn, respectively. For 2011, with the economy recovered,
federal spending’s share will exceed 25% and the deficit will be nearly ten
The Democrats took control of the Congress in 2007 and used the recession as
cover to permanently increased spending on the federal entitlements, regulatory
bureaucracy and silly industrial policies, like high-speed rail and electric
cars. Now the President won’t give much of that back and will ultimately seek
dramatically higher taxes.
Entitlements—mostly Social Security, Medicaid, Medicare--consume about 60% of
the budget, and over the next decade that figure will rise to about 68%. Without
curbing spending in those areas, there is simply no way out of Washington’s
When Social Security was established, life expectancy was 64 and the retirement
age was set at 65, whereas today life expectancy is 78 and the retirement age
reaches 67 in 2027 under current law.
With the baby boom retiring, payroll taxes no longer fund benefits, and by 2118,
payments will exceed those taxes plus interest earned by the trust fund, and
start running down the capital. Eventually, the system will be broke, even with
higher payroll taxes, under any realistic set of economic growth assumptions.
It is time to get serious. Increase the retirement age to 70 for everyone under
age 55. Ten years is plenty to plan for that. Set aside jobs in
municipalities—for example, maintenance positions at the schools or clerking in
county offices—for those individuals over 60 in physically rigorous occupations
that can’t find alternative work.
The United States spends 19% of GDP on health care, while Germany with a system
of mandatory private insurance—note the similarity to Obama Care—spends 12%. The
United States simply can’t afford that competitive disadvantage.
The President’s new health care law is unlikely to deliver promised cuts in
Medicare reimbursements to providers, will likely push US spending above 20% of
GDP and keep the federal deficit in the range of $1.5trn .Don’t believe OMB
deficit projections to the contrary—those have proven consistently too
It is high time for real reform. Limit prices Americans are charged for drugs to
what the Germans pay, slice doctors’ salaries and overhead paid to hospitals and
private health insurance bureaucracies to German levels, and implement genuine
Alas, members of the AMA, pharmaceutical and health executives, and tort lawyers
contribute generously to campaigns of Donkeys and Elephants alike, making Mules
of the rest of us.
Sadly, most Americans are going to wind up paying higher taxes and not getting
much for it but more budget troubles, high unemployment and limited futures for
Jack Lew, White House budget director, gives a preview of the President's 2012 budget:
Senator Robert Portman, (R-OH), discusses what to expect from the 2012 budget:
Professor, Robert H. Smith School of Business, University of Maryland,