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Actual deficit reduction

Adam Newman | Monday, December 6, 2010

Over the past two years, the Republican Party has waged a tireless campaign to inform Americans that they are strongly against the current levels of government spending. The Congressional Republican Leadership has included its solutions to cut government spending in A Pledge to America, a list of promises that Republicans will pursue during the next Congressional term.

In the Pledge, the Republicans offer 10 cuts, almost all of which are exclusively to “non-defense discretionary spending.” Non-defense discretionary spending includes money for infrastructure, college loans, the budgets of the President’s cabinet, etc. Many people don’t realize this sector only makes up 15 percent of the federal budget.

Furthermore, the cuts that the Republicans have outlined would have a miniscule effect towards decreasing a $1.3 trillion budget deficit that is set to increase in future years. One idea in the Pledge is to decrease the $4.7 billion budget of the Congress. Even if the entire budget of the Congress were cut, this would only decrease the deficit by .004 percent. The Republicans mention ending the TARP program, even though the TARP program is a loan program that may actually turn a profit at its conclusion. The Republicans suggest a hiring freeze on civilian employees, even though this would mean six billion in savings per year, decreasing the deficit by .005 percent. Other cuts are extremely vague, such as the proposal to decrease non-defense discretionary spending by $100 billion without stating specifically where the cuts will be made.

I will give the Republicans credit for putting forward ideas that will cut the deficit, but with a $1.3 trillion deficit their ideas are peanuts when compared to what is necessary for actual deficit reduction.

Actual deficit reduction will come from entitlement reform. The three costliest entitlements are Social Security, Medicare and Medicaid, which respectively make up 20 percent, 12 percent, and eight percent of the federal budget with all three increasing in cost annually. While it is critical to make Social Security sustainable, the need to reform Medicaid and especially Medicare are much more important, mostly due to the unsustainable rise in per capita healthcare costs. By 2030, Medicare and Medicaid will cost the same amount as the entire federal budget today. By 2050, Medicare and Medicaid costs will take up every federal tax dollar. By 2080, Medicare itself will to take up every federal tax dollar. The facts speak for themselves: healthcare costs will bankrupt the United States government.

Even though reforming entitlements is the most effective way to curb short term and long term government spending, “A Pledge to America” mentions entitlements only once:

“We will make the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations. That means requiring a full accounting of Social Security, Medicare and Medicaid, setting benchmarks for these programs and reviewing them regularly, and preventing the expansion of unfunded liabilities.”

When politician’s answers do not mention raising the retirement age, changing how physicians are paid for their services, increased funding for research into the cost-effectiveness of treatments and raising the Social Security and Medicare taxes (all of which are necessary), it almost always shows a lack of will to reform entitlements.

If Republicans are serious about reigning in government spending, entitlement reform is the most important step, not small cuts to non-defense discretionary spending. Every other idea that the Republicans mention in the Pledge could be perfectly implemented and would have almost no effect on the deficit due mammoth increases in entitlement spending.

Before I continue, two points need to be made. The first is that it is unfair to say that no Republicans have come up with significant deficit reduction plans. Representative Paul Ryan of Wisconsin has created a deficit reduction plan that privatizes Social Security and makes draconian cuts to Medicare and Medicaid. However, of the 180 Republicans in the House, only 13 have signed on as cosponsors.

The second point is that President Obama and Congressional Democrats currently have no real plan to address long-term deficits. While President Obama should be given credit for creating a bi-partisan deficit reduction committee, promising to freeze non-defense discretionary spending and working to curb the growth of Medicare through provisions in the Healthcare Bill, these three small steps alone will be no match for the looming entitlement costs that the government faces.

Curbing entitlement spending, especially those of Medicare and Medicaid, is the single most important step to put the U.S federal budget on a sustainable path. It is sad to see how passionate the Congressional Republicans speak about their ideas to cut government spending only to see how many of their ideas are actually moot. However, after observing the Republican Congressional leadership for the past few years, I can’t say it’s surprising that such small minds could so miss the big picture.


Adam Newman is a sophomore majoring in finance. He can be contacted at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.