America Starts Talking About Spending Cuts

Americans may need to brace for austerity, but lawmakers are reluctant to endorse deep spending cuts.

After billions in stimulus spending and bailing out banks and automakers, America’s public finances are in a dismal state. This year, the federal deficit alone is set to near $1.5 trillion while the national debt has reached a staggering $13.7 trillion this month. Americans may need to brace for austerity but plans to rein in spending are few and controversial.

Ahead of November’s midterm elections for Congress, Republicans pledged to rein in spending, somehow but they volunteered few specifics. This week, Alan Simpson and Erskine Bowles, the two chairmen of the National Commission on Fiscal Responsibility and Reform which was created by President Barack Obama in January, came up with solutions of their own. They proposed, in a series of detailed recommendations, to reform the pension system, freeze government salaries and put an end to congressional earmarks. Democrats were furious and particularly adamant in their objection to raising the retirement age or cutting seniors’ benefits. Republicans cautiously praised the suggestions while others believe government should go even further.

On his Fox Business show Thursday, David Asman warned that if government continues to grow, the American economy will spiral into a double dip recession. In terms of joblessness, it already has, he said. “There was a double dip in the number of folks who’ve just given up looking for work.” Austerity measures and entitlement reform as proposed by the commission’s two chairmen is a start but no more than that, he added. “Out of $1.37 trillion in non mandated expenses, this report cuts only $200 billion by 2015.” Asman believes that government has to cut “way more than what is outlined in this report.”

The conservative Heritage Foundation has also been critical, pointing out that Obamacare, “unpopular and unaffordable,” would remain in place if the commission chairmen had their way. “That law imposes massive new entitlement spending commitments and tax hikes,” according to Heritage.

While it may well be impossible to rein in spending without reforming the country’s massive entitlement programs, the chairmen’s proposals moreover do not include structural changes to either Medicare or Medicaid. Instead, they rely “upon the existing system of flawed administrative payment and bureaucratic micromanagement.”

The co-chairs’ plan relies on the flawed assumption of government-driven cost control instead of consumer choice and a functioning marketplace. It relies on price controls that always distort the allocation of resources and lead to access problems. One of the most fundamental missing elements from their plan is moving Medicare and Medicaid toward a consumer directed model.

David M. Cote, who is the chairman and CEO of Honeywell and one of the members of the president’s debt commission, agreed that welfare programs cannot be overlooked. “People want to point to stuff like Obamacare, stimulus, Bush tax cuts,” he complained on ABC’s This Week Sunday. “And the thing that everybody misses is, it’s my generation, the baby boomers, who are going to flow through Social Security, Medicare, Medicaid. It’s going to crush the system,” he predicted. In an interview with Newsweek, Texas governor Rick Perry was all the more blunt, calling Social Security a “Ponzi scheme.” He even urged members of his own party who weren’t willing to cut spending to “just go home.”

One Republican who is seriously about balancing the budget is Congressman Paul Ryan who has proposed to reduce spending and limit government by privatizing Social Security and dismantling Medicare to become a voucher based program. On Meet the Press former Federal Reserve chairman Alan Greenspan expressed support for Ryan’s plans, noting that with government borrowing over a third of what it spends, to find spending cuts, lawmakers have to look for “not individual, piecemeal cuts or taxes,” but reconsider whole programs instead.

Many Democrats have been critical of reform however with dozens of legislators lined up and ready to oppose any plan that seeks to “cut or diminish” Social Security. On This Week, Senator Kent Conrad of North Dakota, who also sits on the debt commission, characterized the entitlement reforms that were put out by the chairmen as “shock therapy.”

At the same time, Conrad recognized that the federal government is “borrowing forty cents of every dollar” it spends. “That’s utterly unsustainable.” Unless Washington endeavors to rein in spending, the United States risk becoming a “second rate economic power” according to Conrad. “That is the hard reality.”

The North Dakotan said not to favor raising taxes. A better way to increase revenue, he believes, is “to eliminate some of the loopholes that exist in the system.” Some $100 billion is lost in revenue to offshore tax havens every year, he claimed, and another $50 billion due to abuse of tax shelters. “That can’t be allowed to continue.”

The commission’s chairmen have in fact proposed a reduction in income tax rates but attest that the losses in revenue can be offset by closing tax loopholes and eliminating scores of tax deductions which currently make the American tax code incredibly complicated.

While the president and his fellow Pacific leaders once again attested their commitment to free trade in Yokohama, Japan on Saturday, Cote blamed the American news media for pretending that economics is a zero-sum game — “my loss is your gain, my gain is your loss,” as he put it, while “the only reason you do things economically is because both sides win. When you go to the store and you buy something, the store’s happy, you’re happy. You both benefit. And that seems to get lost when we start talking about economics on a grander scale.”

In his weekly address on Saturday, the president reminded viewers that free trade not only helps American businesses create jobs. “It will also help us reduce our deficits,” he said, “because the single greatest tool for getting our fiscal house in order is robust economic growth.” But his policies hardly suggest such a strong faith in free markets.

Although Obama has denied vilifying business, his agenda is considered by many as an enormous expansion of government at the expense of private enterprise. Greenspan on Meet the Press identified the uncertainty stemming from his administration’s agenda as the foremost impediment to growth. “Business is highly uncertain about the future in a way I’ve never seen it before,” he said. “Unless and until we can begin to lift that pall of uncertainty,” he warned, “it is very difficult to see people reaching out into the longer term.”