It wasn’t supposed to be this way. The fiscal cliff (expiration of the Bush tax cuts, the Obama payroll tax cuts and extended unemployment insurance benefits and the imposition of across the board expenditure reduction on Dec. 31, 2012) meant that we would have a healthy debate about how to restore fiscal prudency over the long-run while growing the economy in the short-run to put America back to work. Jobs and deficit reduction would be the foundation of the debate and the new mandate.
Let’s do a clear evaluation of where we are today. Our politicians have offered us freebies today and commitments for the long-run than cannot be sustained. We need to eliminate some freebies and get our long-term programs under control.
The Boomers and their parents have done well. If you are older than the average life expectancy of 77.8 years, chances are that you will realize more value from Social Security and Medicare than you paid into the system. The life expectancy assumption embedded in Social Security did not capture your extended longevity and the inflation in health care costs has exceeded that embedded in Medicare. David Walker, the Comptroller General (the government’s chief accountant) from 1998 to 2008 and author of “Comeback America,” calculates the debt as follows: recognized on balance sheet debt, $12.9 trillion; unfunded Social Security, $7.7 trillion; unfunded Medicare Part D, $7.2 trillion; and unfunded Medicare Part A and B, $30.8 trillion. The total unfunded “commitments” made exceed $43 trillion over the next 75 years.
Walker’s assumption is that the growth in health care cost, which has exceeded GDP by 2.4 percent per year for the last 40 years, will recede gradually to 1 percent above GDP by year 25 and remain at that rate thereafter. If we are to avoid the $38 trillion of unfunded Medicare liabilities then we must “bend the healthcare cost curve.” We must reform health care in a meaningful way and change our behavior.
Neither presidential candidate offers a solution. Obamacare layers a module to provide universal coverage and bring 45 million people into the health care insurance pool but failed to reform the health care system at the base of that module. The Ryan plan offers a voucher program for the next generation but tells everyone over 54 years old that nothing will change. Clearly, those of us over 54 have to change our behavior.
Tax reform should also be part of the long-term fiscal balance solution. The tax code has tax preferences that currently exceed $1 trillion. At the personal level, the top five preferences (according to 2009 data from Walker) include the following exclusions: employer provided health care, $288 billion; retirement income plans, $120 billion; state and local income taxes, $74 billion; mortgage interest deduction, $67 billion; and charitable contributions, $47 billion. Together, these five exclusions from taxation cost the government $596 billion of revenue; half of our current budget deficit.
President Obama is a populist; populists look out for the little guy. He has no problem talking the talk with speeches that reek of class warfare but has failed to walk the walk. The easiest way to long-term balance of our budget deficit is to eliminate these unfair preferences. But Obama has not focused on them as a tool of policy because the conservative right would rapidly charge that he is revoking his pledge not to raise taxes on anyone earning less than $250,000.
For his part, as part of his growth plan, Mitt Romney has promised a 20 percent across the board tax cut and although he is not saying so, some of these exclusions from taxable income will go to pay for those cuts. According to Bruce Bartlett, author of “The Benefit and The Burden,” only 30 percent of tax cuts are recaptured through additional revenue. With a budget deficit exceeding 6 percent of GDP; is this really a risk we are willing to take?
Howard Dean, former governor of Vermont and guest commentator on ABC’s “This Week,” in discussing Paul Ryan’s voucher program said the following, “political campaigns are not about educating the public; if you are educating the public you are losing the race.” Both candidates’ behavior is consistent with his statement.
One of these politicians will be president. That neither has addressed an integrated solution to jobs, the fiscal cliff and long-term deficit reduction is pathetic. That we have allowed them not to do so is equally pathetic.