Budget Wars

 

Americans are unhappy. Yesterday, a New York Times/ CBS News poll showed that 70% of Americans thought the country was on the wrong track. Increasingly, voters feel a malaise has set in across the country and think Washington is incapable of fixing the country’s precarious fiscal situation. They deplore the petty partisanship shown earlier this month when the government nearly shut down, and look warily at the upcoming vote to raise the debt ceiling.

For weeks, Treasury Secretary Tim Geithner has warned about the “catastrophic implications” that would result if Congress doesn’t raise the debt ceiling from its current $14.3 trillion mark. The United States risks defaulting on its debt if Congress doesn’t act; the Treasury Department has estimated that the U.S. will hit the limit on May 16.

Republicans have said they will only vote to raise the debt limit if Congress enacts structural spending cuts. House Majority Leader Eric Cantor (R-VA), a new member of the president’s deficit reduction task force, has become the GOP’s voice on this issue. Cantor said Republicans will not vote to raise the debt limit unless Democrats agree to statutory spending caps and a balanced budget agreement. In addition, the GOP insists that Congress will only be able to raise taxes and the debt ceiling with a 2/3 majority vote.

So far, Democrats have stood firm. They want a straight-up or down vote on raising the debt limit.

This latest Washington quarrel comes shortly after both sides laid out their austerity plans and tried to convince Americans they were serious about reducing the national debt.

House Budget Chairman Paul D. Ryan (R-WI) came out in early April with the Republican plan that seeks to cut $6.2 trillion in spending over the next ten years. The Ryan Plan would re-shape Medicare for those under 55, essentially making it a voucher system for younger Americans. The Republicans also proposed tax reform that would eliminate loopholes and allow the GOP to lower rates while expanding the tax base. The House passed the Ryan plan shortly before the Easter recess.

Democrats immediately objected. They announced the House budget was dead on arrival in the Senate and claimed Republicans wanted to reduce the debt on the backs of the poor and the middle class, while asking nothing of the rich.

President Obama presented the Democratic alternative in a speech at George Washington University. Mr. Obama proposed reducing the debt by $4 trillion over twelve years by taxing the rich—individuals making more than $200,000 annually and couples earning more than $250,000— and cutting defense spending. The speech was short on details, but full of partisanship. With Rep. Ryan in the front row, the president claimed that the Ryan Plan would lead to “a fundamentally different America than the one we’ve known for generations.”

Many commentators claimed the address was the kick-off to the 2012 presidential campaign. And they were right: the 2012 election will be about what kind of nation Americans want to live in. President Obama believes Americans want to keep the welfare state intact and finance it by raising taxes on the rich. In his address, Mr. Obama noted that while Americans were rhetorical conservatives, they “like the stuff” government provides. The Democrats have told Republicans: keep your hands off entitlements.

Recent polling suggests that’s a winning strategy. An April 11-14 McClatchy/Marist poll asked whether Americans were willing to cut Medicare or Medicaid spending to reduce the budget deficit: 80% opposed doing so.  An April 11 USA Today poll confirmed this sentiment: when asked how the government should deal with Medicare, 61% supported doing nothing or only making minor changes while 31% supported making major changes or overhauling the system.

The New York Times/ CBS NEWS poll which showed how unhappy Americans were, also said that citizens believed government had a responsibility to provide health care: 56% supported while 28% opposed. Independents, the all important category in national elections, were more supportive than the population at large: 61% of them believed Washington should provide health insurance for its citizens. Even more Americans thought it’s the government’s duty to provide insurance for the elderly: 76% support overall, 77% of Independents believe so.

But how will America pay for its welfare state? That’s the question Mr. Ryan tried to answer with his Republican budget. He wanted to reign in entitlement spending without raising taxes.

Unfortunately (for Republicans) early polling shows Americans would rather see taxes rise than cut entitlement benefits. Mr. Obama has said the rich can pay for it all. That’s not true; but that’s what people want to hear.

In fact, America has a serious problem. The U.S. has more than $100 trillion in unfunded entitlement liabilities. That means taxes on everyone must go up over 80% to pay for the welfare-state. You won’t hear that from President Obama. You probably won’t here that from Republicans either.

Some conservatives think you should, though. National Review editor Kevin Williamson thinks it should be a talking-point from every Republican. He’s argued that the Ryan plan is “intelligent” and “reasonable” as opposed to an 88% tax hike needed to pay for maintaining current entitlement obligations.

But it looks like Americans want to ignore the problem. Polling shows citizens don’t want entitlements touched, and with baby boomers beginning to retire, that means social security and Medicare spending will increase exponentially over the next few decades. Voters voice concern about mounting debt and are alarmed when they find out the United States borrows $.40 for every $1 it spends, but seem unwilling to address the reason why profligate spending continues.

Economists have warned this level of spending is unsustainable. Stanford professor John B. Taylor wrote an op-ed in the Wall Street Journal arguing that the Ryan Plan reduced spending to pre-recession levels and put government expenditures at 19.6% of G.D.P. That’s slightly above the traditional cost of government: 18% of GDP. Since President Obama took office in January 2009, government spending has soared to 24.4% of GDP. According to Taylor, the president’s February budget would keep government spending above 24% until 2021. In other words, the United States would continue running trillion dollar deficits for the next decade.

That’s clearly not the way to tackle the debt. The Ryan Plan includes entitlement reform, re-shapes the social contract, and puts government spending at its traditional levels without hiking taxes. The Democratic Plan will maintain the status-quo by raising taxes.

Americans have a clear choice in 2012. Let the campaign begin.

 

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