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July 29, 2014

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Sequester debate hides the cold facts

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Federal deficits are too large, and mounting national debt threatens future generations. But as Democrats and Republicans squabble over the mandatory spending cuts known as sequestration that went into effect this month, they are failing to face the facts of our budget situation or acknowledge the lessons of history.

Since 2007, annual federal spending is up $1 trillion, and deficits jumped from $161 billion to $1.2 trillion over five years.

Higher taxes on the wealthy and Obamacare levies will pull down the gap in 2014, but then it will rise again. Health care, Social Security and slow growth, not low taxes, are the culprits.

Tax rates and rules imposed in January will increase federal revenue as a share of GDP well above its average for the past 40 years. President Barack Obama wants to raise taxes still more, Republicans have refused, and that has brought any attempt to enact serious deficit reduction to a standstill.

Largely absent from the debate, though, is discussion of a major drain on government and private sector budgets: the cost of health care. Americans spend 18 percent of GDP on health care, while the Germans and Dutch, with more government cost sharing and better care, spend about 12 percent.

Even with Obamacare, private insurance premiums and out-of-pocket expenses are skyrocketing, while Medicare and Medicaid have suppressed provider reimbursements to levels so low that many physicians refuse to take publicly financed patients.

Benchmarked against Germany and Holland, U.S. private health care prices are too high, while government rates for the poor and elderly are too low to cover providers’ costs.

Republicans would rely more on markets and competition — scrapping most Obamacare mandates and giving the elderly vouchers to buy private care while hoisting the poor onto the states by replacing Medicaid with block grants.

Those reforms would not bring down private health care prices — cash grants to the elderly and fragmenting Medicaid administration would actually increase them.

GOP strategies would leave many elderly and poor forgoing care, less healthy and dying too young — much like the new reality for the former middle class and the poor in Portugal, Spain and Greece.

The Germans are doing what Obama, House Speaker John Boehner and others are unwilling to conceive: directly reimbursing most health care costs, regulating most providers’ prices, slashing administrative burdens and executive salaries, and eliminating most malpractice suits.

The taxes it would take to accomplish that here would be less expensive for businesses and individuals than the taxes, health insurance premiums and out-of-pocket costs they now bear.

Americans live longer and can work longer, and Social Security and government pension ages should be raised to 70. No system of social insurance or federal finance can work when folks can live an additional 20 or 30 years in retirement.

No tax increase can escape these realities — over-taxation caused nothing but slow growth, misery and decay in southern Europe.

Over-regulation of the private sector does not mitigate but rather exacerbates risks of financial crisis. The greatest threats come not from private bank meltdowns and personal bankruptcies but rather from a loss of confidence in government’s ability to promote adequate economic growth and hence raise revenues to finance its legitimate responsibilities.

Obama inherited a mess — unemployment peaked at 10 percent in his first term — but since his recovery began, economic growth has averaged only 2.1 percent.

President Ronald Reagan inherited a mess, too — unemployment peaked at 10.8 percent during his administration — but at the comparable point in his recovery, growth was averaging 5.3 percent. Fueled by continued strong growth, federal deficits dissolved in the 1990s.

Instead of mounting a campaign to convince the public that cutting federal spending one half of one percent must force food shortages, outbreaks of E. coli and streets without police, the president would do better to read more about Reagan and less about Lincoln — he faces a growth crisis, not a civil war.

Republicans would do better to acknowledge that just as national defense can’t be left to private armies, markets and competition can’t solve health care inflation.

Both sides need to be honest with Americans about working longer and accept a radically different role for government if they want to leave the nation to their grandchildren as they inherited it — prosperous, secure and solvent.

Peter Morici is an economist and professor at the University of Maryland’s Robert H. Smith School of Business. He wrote this for the Baltimore Sun.

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  1. Good article author. Fair and balanced. Thank you.

    CarmineD

  2. ...but with a couple of errors, Carmine.

    SS was enacted in 1935. At that time the overall life expectancy for a newborn male was 59 years, for a newborn female, 63 years. Life expectancy at age 65 (SS retirement age) was 77 for males, 78 for females.

    In 2012 estimated life expectancies for newborns were estimated to be 76 for males and 80 for females. For those turning 65 in 2012, the life expectancies were 82 for males and 84 for females.

    Yes, life expectancy for newborns of both sexes had increased substantially by 2012, but these people will not hit age 65 retirement until 2077, have very limited impact on current outlays, and will generally be paying the SS tax that much longer. Life expectancy for those who actually hit retirement age in 2012, went up only 5 years over 1935 for men and 6 years for women. THAT is the statistic of interest - and it is FAR below the claim that they are living 20-30 more years longer since 1935.

    The deficit is actually in DECLINE despite popular opinion that it is increasing. (Easy to read inflation-adjusted chart at http://www.davemanuel.com/history-of-def....) The general trend has been upward, EXCEPT for the 2009 fiscal year and those following: 2009 hit $1.51 trillion, 2010 fell to $1.36T, 2011 fell to $1.32T, 2012 fell to $1.10T, and 2012 (before sequester) was projected at $0.88T.