- The Washington Times - Monday, December 27, 2010

Before leaving for his Hawaiian vacation, President Obama signed a two-year extension of existing tax rates for most businesses and individuals, forestalling the steep tax-rate increase programmed to take place Jan. 1.

Despite all the talk about fiscal responsibility that accompanied the debate on the tax package, Congress did nothing to cut government spending.

The fiscal imbalances, if not addressed, will only grow worse. Eventually, the debt burden may become unsustainable. The Congressional Budget Office (CBO) projects that without changes in policy, federal debt held by the public would grow from 62 percent of gross domestic product (GDP) today to 100 percent of GDP by 2022 and 200 percent of GDP by 2037.

Such high levels of debt reduce the amount of savings available for productive investment, reducing future output, income and consumption. Higher debt makes it harder for policymakers to respond to unexpected problems, such as future recessions. Higher debt increases the possibility that investors will lose confidence in the government’s ability to meet its obligations, triggering a Greek-style fiscal crisis.

Some deficit reduction will have to be undertaken eventually. The longer we wait, the higher the real costs become. A CBO study released in early December examined the impact of postponing, from 2015 to 2025, fiscal reform that stabilizes the ratio of debt to output. The CBO analysis found that in the long run, output will be at least 2.5 percent lower, consumption 1.5 percent lower and capital stock 7 percent smaller than they would have been had the reform been enacted sooner. This means a substantial reduction in the standard of living for most Americans.

According to the CBO, over the long term, the federal deficit is driven entirely by growth in mandatory spending programs such as Social Security and health care (including Medicare, Medicaid, the Children’s Health Insurance Program and the subsidies introduced by the recent health care legislation).

Under projections that assume continuation of current fiscal policies, federal health care outlays will increase from 5.5 percent of GDP this year to 10.9 percent in 2035 and will continue to grow thereafter. Social Security outlays are projected to increase from 4.8 percent of GDP today to 6.2 percent in 2035. Together, these mandatory expenditures will account for nearly two-thirds (65 percent) of all government spending 25 years from now, other than interest on the national debt - up from about 45 percent today.

The deficit-reduction plan proposed recently by the bipartisan National Commission on Fiscal Responsibility and Reform includes what many would consider to be drastic measures. In fact, it may not go far enough.

Among the proposed changes are several measures that would force Medicare beneficiaries to pay more health care costs out of pocket before Medicare or Medigap insurance kicks in. By restricting first-dollar coverage, these changes are intended to reduce overuse of care and overall spending. The commission also proposed a number of changes to Social Security, all of them in the direction of reducing future benefits and increasing tax revenue. (On the heels of this, interestingly, the recent tax compromise includes a two-year reduction in payroll taxes, which will decrease Social Security revenues.)

Virtually all of the changes proposed by the deficit-reduction commission would have been non-starters in the 110th Congress. Though the costs of delay are exceedingly high, politicians seem all too willing to postpone the unpleasant measures required to address the deficit problem. It would be too simple to say that the reason for this is only the politicians’ myopia. Most politicians behave this way because voters reward such behavior.

There are reasons for that. The reforms that address fiscal imbalances have different effects on different generations. By and large, CBO found, people who are older than 50 today stand to benefit most from postponing the needed fiscal reforms. By way of contrast, the costs of delaying action - in the form of higher debt and the problems it brings - will fall most heavily on those who are not old enough to vote today.

This is the real tragedy of our deficit-spending addiction: Nobody seems willing to fight for America’s children.

Polina Vlasenko is a research fellow at the American Institute for Economic Research.

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