A few thoughts on Obama’s proposed budget

I’ve been trying to tell my friends on the right for the last few years that in a second term Obama would propose a budget that would cut future spending on Medicare and Social Security.

Should he have proposed those items?

As I understand it at this point, the Medicare cuts would come primarily from reduced payments to drug companies and from some means testing that would force wealthier seniors to pay more into the system.

Those seem like reasonable changes — maybe too reasonable. I would advocate a more aggressive form of means testing, including some significant increases in Medicare premiums for seniors who can afford them. I would also raise the cap on income that is subject to payroll taxes.

The use of chained CPI to reduce the rate of increase of Social Security is more problematic. Social Security can remain solvent through minor adjustments in the income cap for payroll taxes and through some form of means testing. It’s also worth saying that a large percentage of Americans within a couple of decades of retirement are totally unprepared for their retirements. It’s likely that we will have no choice but to beef up Social Security for some percentage of seniors.

In effect, Obama has called the Republicans’ bluff on entitlements, as the Washington Post’s Wonkblog notes.

Will Republicans now actually support entitlement cuts — ones they have already voted for — now that there’s a chance of those cuts really happening?

House GOP campaign head Greg Walden has already called Obama’s budget a “shocking attack on seniors.”

While seniors have been the GOP’s most solid supporters in recent elections, seniors broadly and strongly oppose the very cuts that the GOP has championed, a form of which now appears in the President’s budget.

Click here for a great interactive graphic about federal spending and you can get a better sense of the difficulties in this process. About 2/3rds of federal spending is “mandatory” — it’s on programs that cannot be cut without congressional action. That category is dominated by Social Security, Medicare, and Medicaid, but also includes federal retirement, a variety of military benefits, and the like.

About half of discretionary spending currently goes to the military, cuts to which many politicians — including a significant number of Republicans — oppose.

Obama also wants to close part of the budget gap through targeted tax “reforms” that will reduce deductions for wealthy Americans and generally raise their taxes. I approve of those changes. Without those additional revenues, we’d likely have to make draconian — and politically impossible — cuts to entitlements for seniors.

Let me add that I don’t sense any crisis here, although the recovery remains sluggish for a variety of obvious reasons, and even though we are going to feel some real pain because of the sequester. In fact, with the deficit reduction already in place, the “federal budget deficit is shrinking rapidly.” As a percentage of GDP, our yearly deficits have been cut in half, and Obama’s budget would reduce yearly deficits to less than 3 percent of GDP over the next decade. That would stabilize the current debt as a percentage of GDP, but it would do nothing to actually reduce the debt.

If we want to reduce the debt, we’ll need deeper cuts to the military and to entitlements and/or additional tax increases.

There is no easy answer here.

I’m surprised by all the public rhetoric about the dangers of deficits and debt after there was so little concern, especially from the right, during the Bush years. Yes, we need to keep the debt from consuming us, but America is an incredibly wealthy and resourceful country. While I would prefer a budget blueprint that includes additional spending cuts and additional tax increases to bring the budget into full balance and begin reducing the debt by 2020 or so, the president’s budget is a credible one.

By the way, I don’t regard some budget blueprints as credible. Those that do not detail savings by identifying programs to be cut are simply not credible.