Thursday, November 11, 2010

Obama's Deficit Commission Report Analysis

Obama's bi-partisan deficit commission reported it's first plan on fixing our deficit and national debt problem. They included a number of spending cuts in the report and they recommended some changes to tax policy. I have provided a graph of spending and tax revenues from the CBO which I have used to criticize the current version of the Commission's plan.

The first problem is that they assume that tax revenues are flat at around 20% of GDP. In other words, they have shifted the tax burden around but they refused to deal with possibility that taxes may have to increase in order to reduce future deficits. The second problem is that the spending issue is absolutely clear from the graph. Medicare is growing much faster than revenue and GDP. This is because health care prices are rising twice as fast as GDP, and because the number of Medicare recipients will increase as the baby boom generation becomes eligible for Medicare. Unfortunately, the report is long on cuts in discretionary spending which is only a small part of the budget and is not growing faster than GDP or tax revenue. The report also proposes major changes to Social Security which is only a minor problem relative to growth in Medicare spending.

In conclusion, a lot of people wasted their time on the wrong problem. Its hard to understand how that happened but one can hazard some guesses. Changes in the price of health care services would be strongly resisted by the entire health care services delivery establishment. Therefore, it is politically impossible to deal with. Social Security, which is much less of a problem, however, gets more attention because it is easier to fix with minor changes to revenue and benefits. It also seems to be a fetish among Republicans who continue to view it as a Democratic program that really works. In George Bush's recent book he said that his biggest regret was his inability to privatize Social Security. Discretionary spending receives attention because its easy to mess around with the budget and make lots of small changes that give the appearance of real effort but which have only a small impact on the outcome. Lastly, the report fits in nicely with the conservative prohibition against any efforts to pay for government services with tax revenue. Both Reagan and the junior Bush were successful in cutting taxes and paying for government services with debt.

1 comment:

  1. Its fortunate that Social Security was not privitized, given how the markets played out in recent years.

    It does baffle me that so many people want all these without paying for them.