By Peter Morici
To avert the fiscal cliff, President Obama may get Republican cooperation in soaking the rich, but the deal that emerges could put the nation in dire straits by the end of the decade.
The Budget Act of 2011 requires the President and Congress to cut federal deficits by $1.2 trillion over nine years, or annual defense and non-entitlement outlays automatically will be reduced $107 billion annually on January 1. Also, the Bush tax cuts, payroll tax reductions and other assorted programs expire.
Overall, annual spending would be cut $136 billion, taxes raised $532 billion, and economists fear a staggering recession would result pushing the unemployment rate into the teens.
The President's Plan
President Obama wants to raise tax rates on families and many small businesses earning more than $250,000, and Congressional Republicans would like to curb entitlements by increasing Medicare premiums paid by wealthier participants and slowing Social Security cost of living increases.
The President also wants additional stimulus spending and the likely package would reduce the annual deficit by about $200 billon, but that is hardly enough to fix what is broke.
In 2013, the budget gap will exceed $1 trillion—up from $161 billion in 2007. Outlays for Social Security, Medicare, Medicaid and other entitlements are up $665 billion, and those may be expected to increase another $1.1 trillion by 2020. Keeping non-discretionary spending in line with inflation would cost another $300 billion.
No Easy Fix
The bottom line: Even if Mr. Obama delivers on his campaign promise to tax the rich and Republicans obtain some curbs on entitlement spending, the federal deficit will likely remain near or above $1 trillion for the foreseeable future and could easily rise to much more by the end of the decade.
That's if the bond investors permit Washington to continue reckless borrowing, and the Federal Reserve does not have to unleash inflation by printing money to buy trillions in new U.S. Treasury securities the bond market won't take.
Americans are living longer and health care costs are rising exponentially. Obamacare will do little to curb the latter, because it does more to extend insurance coverage through government subsidies and employer mandates than it does to contain rapidly rising prices and demand for services created by breakthroughs in medical technology.
Solutions Are Out There
The reasonable solutions are to raise the Social Security retirement age to 70, and pattern U.S. health care after other national systems that better contain costs.
The Germans and Dutch spend one-third less on health care, because their governments more aggressively regulate prices, better ration care, and spend less on lawsuits.
Democrats, hamstrung by unions, are loath to require Americans to work longer, and are too beholding to tort lawyers and the medical establishment for campaign support.
Republicans refuse to admit vouchers and more competition—we already have plenty of the latter among providers, drug and device manufacturers, and insurance companies—won't adequately slow rocketing costs.
Without significantly raising the retirement age, more effective price controls and rationing in health care, and torts reform, federal spending and the national debt will jet into the stratosphere—no matter what the President and Congress agree to in their current negotiations.
Mounting interest payments will cause investors to balk at buying U.S. Treasurys, and draconian reductions in federal spending that must follow will thrust the United States into the kind of crisis now gripping Greece and Spain.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.