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January 21, 2010

Will Obama Choose Fiscal Responsibility or Gimmicks?

By

OPINION/ANALYSIS:

President Obama spent 2009 engaged in an unprecedented first-year spending spree. Now he is apparently planning to spend his second year creating the illusion of fiscal responsibility.

On the campaign trail, then-candidate Mr. Obama promised a "net spending cut." Instead, he signed a historic $787 billion "stimulus" bill, expanded the State Children's Health Insurance Program's health subsidies by nearly $100 billion (including gimmicks), bailed out the auto companies and increased discretionary spending by 8 percent.

Candidate Obama also pledged to "slash earmarks to no greater than 1994 levels" (which would be 1,318). Then he signed into law more than 10,000 earmarks, the fifth-highest total ever.

President Obama promised that "If your family earns less than $250,000 a year, you will not see your taxes increased a single dime." But by that point he'd already signed into law a tobacco-tax increase affecting people of all incomes. He has since endorsed health care and energy taxes that will affect tens of millions of middle- and lower-income families.

Not done yet, Mr. Obama hopes to enact health care and cap-and-trade energy legislation whose combined cost would approach $2 trillion in their first decade, and steeply rise thereafter.

Taxpayers will pay dearly for this spending spree. Federal spending per household would rise from $25,000 in 2008 to more than $37,000 by 2019 (after inflation). Budget deficits are likely to stay above $1 trillion indefinitely, and Washington may have to borrow a staggering $13 trillion over the next decade -- nearly $100,000 for every household. The result: Slower economic growth, higher interest rates and painful tax increases.

Polls show growing anxiety over the president's borrow-and-spend agenda. With Congress 10 months away from facing an angry electorate, policymakers, the president and his Democratic majority face enormous pressure to portray themselves as fiscally responsible. Unfortunately, they seem to be choosing gimmicks over actual reform.

Mr. Obama has reportedly asked agencies to submit budgets freezing fiscal year (FY) 2011 discretionary spending at the FY 2010 level. While perhaps sounding fiscally responsible, this is woefully insufficient in the current budget environment

Nominal discretionary spending has leaped 25 percent in the past three years. Overall since 2000, it has doubled from $536 billion to $1.1 trillion. And that doesn't even count the additional $311 billion in "stimulus" funding discretionary programs received last year. Nor does it count the $160 billion spent annually in Iraq and Afghanistan.

These unaffordable spending increases should be repealed, rather than permanently locked in with a discretionary spending freeze. After all, a debt-ridden family that had borrowed $20,000 one year to spend on unnecessary items would not win applause by spending that same amount the following year. That family should cut back the unnecessary and unaffordable spending, not incorporate it into a higher permanent baseline.

Spending freezes can be circumvented, too. Congress has typically responded to tighter discretionary spending limits by simply declaring all additional spending "emergencies." There is every reason to expect that practice would continue.

On entitlement spending, the president likely will renew his call for a Pay-As-You-Go (PAYGO) law mandating that each year's tax and entitlement legislation collectively achieve deficit-neutrality. This may sound good, too, but it's another gimmick.

When PAYGO was a law from 1991 through 2002, it was never enforced. Over those 12 years, Congress enacted $700 billion in non-offset entitlement expansions and tax cuts, and then cancelled every single required spending cut that would have enforced the law. As a result, entitlement spending actually grew faster after PAYGO's implementation.

Furthermore, Congress has had its own PAYGO rule since 2007. And lawmakers have waived PAYGO every time it proved even slightly inconvenient.

They waived it to extend unemployment benefits. They waived it to create a $63 billion veterans' entitlement. They waived it for the $787 billion "stimulus" bill. House Speaker Nancy Pelosi, California Democrat, suggested that PAYGO be waived for any bill she thinks will help the economy. Other times, Congress resorted to expensive gimmicks. Spending skyrocketed accordingly.

The current PAYGO legislation supported by Mr. Obama would exempt all discretionary spending (which makes up 40 percent of the budget). It would exempt the automatic annual growth of Social Security, Medicare and Medicaid that threatens Washington's long-run solvency. It would exempt the endless stream of emergency "stimulus" bills. And when PAYGO is violated, the current legislation would exempt nearly all spending from being cut to offset the new expansions. The law is practically designed to fail.

Thus, the real purpose of PAYGO is to provide lawmakers with a talking point on fiscal responsibility. It exists for campaign ads and press releases, not actual legislating.

If Mr. Obama is serious about reining in spending and budget deficits, he needs to propose real and specific spending cuts. This means repealing the economic stimulus and the Troubled Asset Relief Program, bringing Social Security and Medicare into long-run sustainability and bringing discretionary spending back to pre-recession levels.

It also means putting the brakes on an unaffordable new health entitlement and on any cap-and-trade energy program. If the president won't legitimately restrain spending, taxpayers should prepare for future tax hikes that could top $10,000 per household.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First appeared in the Washington Times

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