The Politics of Wishful Thinking

In the Great Budget Debate, Democrats and Republicans are closer than you might think. Neither is proposing a balanced budget any time soon; both peddle soothing myths to convince supporters that they're upholding either "liberal" or "conservative" values. Meanwhile, the public seems largely clueless about the enormity of the problem. In 2021, the Congressional Budget Office reckons that even after a full economic recovery the remaining deficit will equal almost 5 percent of Gross Domestic Product. In today's dollars, that's $750 billion. It's the hole that needs filling.

We won't make much progress until a) Democrats concede that spending control requires genuine cuts in Social Security and Medicare, which now total $1.3 trillion annually and represent 35 percent of federal outlays; and b) Republicans acknowledge that, even after significant spending cuts, tax increases will be needed to balance the budget. Last week, there was little sign of either. President Obama rebuffed Social Security and Medicare cuts. Most Republicans held fast on taxes.

What we have instead is a public relations war. Both parties propound brands of wishful thinking designed to make it seem that they're accomplishing more than they are.

Start with the Republicans. House Budget Committee chairman Paul Ryan's plan fulfills the no tax increase requirement. Yet, deficits shrink. How does he do that? Well, he doesn't touch Social Security, the government's biggest program with $9.9 trillion of projected spending from 2012 to 2021. He does propose a voucher program for Medicare, but it doesn't take effect until 2022 and exempts the 77 million Americans now 55 and over. Ryan isn't picking a fight with seniors.

He achieves big savings by assuming deep cuts in most of the federal government beyond Social Security, Medicare and Medicaid. Ultimately it shrinks to almost nothing. That's defense, food stamps, highways, federal courts, basic research…and much more. Altogether, these programs constitute about 12 percent of GDP. By 2022, Ryan's plan would reduce them to 6 percent of GDP; by 2050, they'd be about 3 percent. The United States would virtually disarm, dismantle much of the social safety net and starve important federal responsibilities, from environmental regulation to the FBI. This isn't likely to happen—and shouldn't.

Democrats are as bad or worse. Remember that Obama's original budget for 2012 envisioned deficits of $9.5 trillion over the next decade (2012-2021), as estimated by CBO. So Obama's now-promised additional $4 trillion of savings over 12 years--and another $2 trillion of deficits—would barely touch the problem. Rhetorically, Democrats finger familiar villains to explain and cure the deficits. These don't withstand scrutiny.

One is: Bush's tax cuts for the rich. The trouble is that Obama's budget already assumes higher rates (39.6 percent) on incomes exceeding $200,000 (individuals) and $250,000 (couples). Suppose we get tougher on the very rich. One proposal would raise rates to 45 percent on incomes from $1 million to $10 million, with rates increasing to 49 percent on incomes of $1 billion. Over a decade, tax revenues would grow about $900 billion, says the advocacy group Citizens for Tax Justice. Assuming the money materialized, it's a lot—but only a tenth of the decade's deficits.

Another liberal villain: the wars in Iraq and Afghanistan. They've cost $1.26 trillion from 2001 to 2011, reckons CBO. Again, a lot of money. But it, too, pales next to all spending ($29.8 trillion) or deficits ($6.2 trillion) over the same period. Here, too, Obama's budget already assumes big cuts.

Our budget problem is simple. Government's spending promises vastly exceed existing taxes. We still await a serious debate. Republicans advance a radical plan for shrinking government; Obama defends the status quo of ever-bigger government. The most optimistic reading of the deadlock is that these are negotiating positions and that both sides, needing to raise the federal debt ceiling, will come off their posturing. It's a hope.