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News : US Economy Last Updated: Feb 15, 2011 - 5:44 AM

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

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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 ever.

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 spending.

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 government.

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 times larger.

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 fiscal mess.

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 optimistic.

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 malpractice reform.

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 their children.

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:

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone




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