Myth: The problem is the deficit. The real issue isn't the deficit. It's the exploding spending on the elderly - for Social Security, Medicare and Medicaid - which automatically expands the size of government. If we ended deficits with tax increases, we would simply exchange one problem (high deficits) for another (high taxes). Either would weaken the economy, and sharply higher taxes would represent an undesirable transfer to retirees from younger taxpayers.Unfortunately, the truth is not fun and won't excite voters to be told that they have to give up some of the promised pie-in-the-sky benefits that politicians have been deceiving the American people about for decades.
l Myth: Eliminating wasteful or ineffective programs will close deficits. The Republican Study Committee - 176 House members - recently proposed $2.5 trillion of cuts over a decade in non-defense, non-elderly programs. This plan would kill dozens of specific programs. Now, many of these programs should go; they're either unneeded or ineffective. Consider one candidate for elimination, the Corporation for Public Broadcasting. In an information-drenched society, it's hard to justify government subsidies for TV and radio.
But this budget category covers only a sixth of federal spending, and squeezing it harshly would penalize many vital government functions (research, transportation, the FBI). The Republicans' cuts are huge, about 35 percent. Even so, they would reduce projected deficits by at most a third. Over the next decade, those deficits could easily total $7 trillion to $10 trillion.
l Myth: The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so. Both programs are pay-as-you-go. Today's taxes pay today's benefits; little is "saved." Even if all were saved, most retirees receive benefits that far exceed their payroll taxes. Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study.
It's a cliche, but true: There are no easy - or popular - solutions. Controlling the budget requires some combination of (a) reducing benefits for the elderly; (b) downsizing other programs, including defense; and (c) raising taxes. Not only did Obama avoid choices, but he failed to frame the debate in a way that clarified what the choices are. So public opinion remains muddled, and politicians - sensitive to public opinion - remain stalemated.
Obama's expedient evasion is the opposite of presidential leadership. It maximizes short-term approval ratings while running long-term risks. A loss of investor confidence could trigger a chaotic flight from Treasury bonds and the dollar. One economist recently wrote in the Financial Times: "I hope it does not ultimately require a crisis to restore fiscal [responsibility] . . ., but I fear it will." That was Peter Orszag, Obama's first budget chief. Sobering.