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Obama and Fiscal Irresponsibility PDF Print E-mail
Saturday, 21 February 2009 16:10

Written by Richard M. Ebeling              

Friday, 20 February 2009


President Obama is hosting a “fiscal responsibility summit” on February 23 that has the goal of reining in the projected growth in government spending in the years and decades ahead. Any such reform, however, will require a dramatic change in the role of government in American society.


In the last six months, as the current recession became worse, the cost of government has exploded on top of the large expansion in government spending during much of the Bush Administration. (See, “Big Government under the Bush Administration.”)


The bailout to the financial markets, already spent or planned, by the U.S. Treasury and the Federal Reserve Bank totals over $2 trillion. The U.S. automakers have received or requested a bailout of more than $30 billion.  The recently passed stimulus package adds another $787 billion to Uncle Sam’s budgetary expenditures. And President Obama’s plan to subsidize homeowners facing foreclosure and prop up the housing market may add a further $275 billion to government spending.


Even before the stimulus package was passed earlier this month, the Congressional Budget Office was estimating that the Federal government’s budget deficit for the current fiscal year would be at least $1.2 trillion. If we now add the hundreds of billions of dollars in additional government spending in 2009 due to the stimulus bill and the bailout for bankers, automakers, homeowners, Washington could be facing a budget deficit this year that approaches $2 trillion.  This would be equal to two-thirds of the entire Federal budget in fiscal year 2008.


But the story does not end there. Facing the United States in the decades to come are the projected costs of Uncle Sam’s unfunded liabilities.  These expenditures are huge even in comparison to the recent growth in government spending and deficit financing.


The U.S. Treasury and the Social Security and Medicare Trust Funds project an explosion in government spending in the decades to come to finance the retirement and health care costs of 78 million baby-boomers who in just a few years will start leaving the work force.


The Treasury and the Trust Funds use a 75-year time horizon in their projections. They estimate that the current present value of unfunded liabilities for both Social Security and Medicare over the next three-quarters of a century totals nearly $43 trillion. Social Security makes up $6.6 trillion of this amount and Medicare costs comprise the remaining $36.3 trillion.


In other words, the U.S. government would need to have $43 trillion in hand, right now, and earning about 3 percent interest to cover all the Social Security and Medicare expenses that will not be covered by future Social Security or Medicare withholding taxes or premiums (as specified in current legislation).


In 2008, the Gross Domestic Product (GDP) of the United States was around $14 trillion. This means that government would need to have sitting in an account collecting interest a sum equal to three years of U.S. GDP.  Obviously, Uncle Sam does not.


Now, of course, the government does not need this actual sum in hand. What it will need is to raise taxes and/or borrow sufficiently each of these projected future years to cover the shortfall in Social Security and Medicare revenues, given whatever the eligibility requirements are in those future years. But these, nonetheless, will be large amounts of government spending on top of all other expenditures Uncle Sam will undertake in future decades.


(See “Brother, Can You Spare $43 Trillion – to Cover Uncle Sam’s Unfunded Liabilities,” AIER Research Report, Vol.  LXXVI, No. 4, March 2, 2009, for a more detailed analysis.)


Already critics on President Obama’s “left” and many of the more “liberal” members of Congress have expressed concern that in convening a “fiscal responsibility summit” he will cave in to the “fiscal hawks” that want to slow down or even reverse some of these current and future projected expenditures.


But whatever rhetoric the president may use at the summit, it is highly unlikely that he will undertake any radical change in or reversal of the spending trajectory upon which the U.S. government is heading.


After all, in his inaugural address on January 20, President Obama said: “The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, health care they can afford, a retirement that is dignified.”


In other words, our new president takes for granted that it is the role and responsibility of the government to paternalistically provide decent paying jobs, medical care and retirement pensions for the entire population of the United States. And he clearly had no interest in or concern with broader political philosophical questions of whether government is “too big” versus “too small.”


His premise that government has these interventionist and redistributive roles to play in society define the terms of the debate in his mind. The Federal government is to be an even larger Welfare State than at present; the only issues open to debate are figuring out ways it can fulfill this role in a more effective and cost-efficient manner, if possible. (See, “Barack Obama and the Meaning of Socialism.”)


This means that Obama’s critics to his “left” have little to fear. No doubt some new entitlement reform commission will be formed, delegated the task of “fixing” the problem of these staggering Social Security and Medicare costs coming down the road. Proposals may include raising the retirement age to receive full Social Security benefits, lowering some benefits, as well as increasing Social Security withholding taxes at some point.


Most likely it will be recommended that Medicare costs should be held down through various forms of price controls on doctors’ fees, hospital services and surgical procedures, and prescription drugs. At the end of the day, such price regulations will only produce shortages of desired medical care, result in growing corruption to obtain services outside the regulatory rules, reduce the quality of hospital and related health care services, and retard the availability of new pharmaceuticals that are too costly to develop and market under such price controls.


What will not be debated is whether government should be in the pension and health care business at all.  Little thought will be given to the possibility that it has been government’s involvement in retirement and health care provision over the last several decades that has created the problem the country now faces. No discussion will be undertaken to consider how retirement planning and medical services might be returned to the citizenry in the form of personal responsibility and private sector provision.


This can only come about by asking the questions that President Obama has taken off the table: What are the individual rights and responsibilities of the citizenry for their own personal affairs? What are the limited and legitimate functions of a government in a free society? And how is that proper balance between individual liberty and constitutionally restrained government to be restored?


In other words, there will be no real and meaningful agenda to fix America’s fiscal dilemmas. The costs of big government will most likely continue to grow and burden the American people in the years and decades to come. And any significant reform in these entitlement programs will be shifted, once more, to the future for another president and Congress to grapple with.


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