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Analysis/Comment Last Updated: Nov 1, 2011 - 5:10 AM


Dr. Peter Morici: Don’t raise taxes or cut defense to solve US budget woes
By Professor Peter Morici
Nov 1, 2011 - 1:03 AM

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President Obama and the First Lady celebrate Halloween at the White House, Oct 31, 2011.

Dr. Peter Morici: Whether the Joint Select Committee on Budget Reduction reaches a deal to reduce the US federal deficit by at least $1.2trn or stalemates on November 23, Democrats appear intent on handicapping the national economy with higher taxes and imperiling national security by cutting defense. Those are the wrong places to solve the nation’s budget woes.

In 2007, just prior to the financial crisis and when Democrats took control of Congress, the deficit was a manageable $161bn. Wars in Iraq and Afghanistan were ongoing, and Bush tax cuts and prescription benefits for seniors were in place.

In 2011, two years after the recession ended, the deficit is $1.3trn. Spending is up $847bn, and additional temporary tax cuts - - such as the payroll tax holiday - - account for the rest. Of the $847bn, only $62bn was necessary to accommodate inflation, and social security, health care and other entitlements account for 78% of the rest.

Repeatedly, Democrats President Obama and Majority Leader Reid have exhorted Social Security is not contributing to the deficit, but the program began paying out more than its receipts in 2009, and the Trust Fund will be entirely depleted by 2036.

Federal and state budgets are burdened by the least effective health care and education systems among industrialized countries. For example, the German and Dutch private systems spend about 50% less per capita and accomplish better outcomes. 

Progressive Education advocates equate reform with more money, even though the United States has one of the most expensive systems on the planet and gets subpar results—test scores are lower and graduates lack job skills employers seek to build globally competitive enterprises.

Raising taxes to accommodate, instead of fixing those shortcomings would permanently burden the US private sector with more overhead—higher taxes, health care premiums and tuition—than foreign economies bear, making economic recovery and adequate jobs creation next to impossible.

Real reform requires spending less, not more, by ferreting out waste foreign health and education systems do not impose on taxpayers and businesses.

Yet, the Budget Control Act requires if the Special Joint Committee can’t reach a deal - -  and Democrats remain steadfast they will block any deal that cuts federal health care spending or does not raise taxes—then sequestration imposes $1.2trn in cuts on other discretionary programs and defense.

Budget calculations imposed on the Special Joint Committee already score savings from ending wars in Iraq and Afghanistan; hence sequestration requires the base defense budget -- defense spending less costs of troop deployment - - contribute 42% of the $1.2trn, and that is not practical.

US military hardware is aging and becoming less effective—sons are manning fighters flown by fathers and the typical Air Force bomber is 34 years old.  

Air force fighters are down from 3,602 in 2000 to 1,990 in 2011, and will fall to 1,739 at current funding levels. Similarly, navy ships are down from 316 to 288, and will fall to 263. Sequestration would reduce those much further.

Cyber warfare and China, which is building a navy to challenge the United States in the Pacific, do not shift US security challenges from one venue to another but rather add to them. Specifically, US and allied dependence on Middle East oil will continue for another generation—even with the best efforts to develop alternative energy resources—and US naval assets cannot be shifted from the Persian Gulf to counter China’s buildup in the Pacific. Economic and political upheavals in Europe and North Africa make the US naval presence in the Mediterranean and North Atlantic even more vital.

Current Chinese military spending is only about 17% of US base budget outlays, but China’s currency is widely acknowledged to be undervalued. Applying IMF Purchasing Power Parity exchange rates, Chinese spending is 27% of the US base budget. Based on recent growth, China’s military spending would be 66% of US levels in 2021 without sequestration, and 60% with sequestration.

China does not have troops, aircraft and naval assets tied up around the world with established commitments, and with defense spending at 60% of US levels, it will seriously challenge the US guarantee of security to Taiwan, Japan and even Australia.

To get the economy going and meet US security commitments, the budget deficit must be tackled, but that begins with finally recognizing Social Security, health care and education must be reformed to absorb fewer not more national resources.

Super Committee Must Find $1.5T: The Super Committee must find $1.5T in cuts over the next decade and CNBC's John Harwood has the details:

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

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

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