Absent fiscal restraint, history will be unkind to Obama

White House/Lawrence Jackson

Supreme Court Chief Justice John Roberts administers the oath of office to President Barack Obama during the official swearing-in ceremony in the Blue Room of the White House on Inauguration Day, Sunday, Jan. 20, 2013. First Lady Michelle Obama, holding the Robinson family Bible, along with daughters Malia and Sasha, stand with the President.

Article Highlights

  • The past four years were not exactly a new era of fiscal responsibility. Deficits and the national debt skyrocketed.

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  • The case for moving forward now on entitlement reform rests fundamentally on the notion of generational fairness.

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  • It remains unclear whether the President will have the political courage to focus on the long-term needs of the economy.

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President Obama took office four years ago talking not just about short-term stimulus, but also about the need to face up to the challenge of the long-term U.S. fiscal deficit. As he put it in a January 15, 2009, interview with The Washington Post, the then president-elect said he wanted to make "sure some of the hard decisions are made under my watch, not someone else's."

The past four years were not exactly a new era of fiscal responsibility. Spending surged, the Medicare drug benefit was made more generous, and a new health insurance entitlement was added with funding that is likely to prove illusory (steep payment cuts to hospitals and other medical providers, along with tax cuts that are supposed to hit on the next President's watch; neither measure seems likely to happen). Deficits and the national debt skyrocketed.

To be sure, fiscal support for a weak economy made sense early on. But many of the particulars of the Obama spending binge were wasteful, and it would have been better in the first place to mate a near-term stimulus to a credible program to tackle the fiscal deficit over time. This means moving forward with changes to Medicare, Medicaid, and Social Security, the entitlement programs that drive the long-term U.S. deficit. Instead, Mr. Obama dismissed the suggestions of his own fiscal commission.

The second term is a chance to begin anew. In the summer 2011 deficit talks with Speaker Boehner, President Obama was thought to be amenable to changes in the indexation of Social Security benefits that would slow spending growth in a progressive fashion, increases in deductibles and co-pays for Medicare beneficiaries with high lifetime earnings, and a gradual increase in the Medicare eligibility age. The President would naturally look to combine these measures with additional revenues. Such a package would be a start to what is needed to head off the inexorable rise in the U.S. debt set to start in five years.

The problem for President Obama is that the combination of his re-election decision to demagogue against changes to Social Security and Medicare, and his fiscal cliff strategy focused on tax revenues now makes it politically difficult for Mr. Obama to support adjustments to entitlements. This is the case even though he well understands that entitlement reform is needed even with further tax hikes or cuts to spending on defense or other areas.

The first challenge for President Obama, then, is to convince his own supporters of the need to make the hard choices he once promised. For this, Mr. Obama must make the progressive case for fiscal adjustment: without changes to Social Security, Medicare, and Medicaid, the government will not have the free resources to devote to issues such as training, education, affordable housing, energy, the environment, and so on. Instead, the federal government will be devoted to transfer payments with a touch of spending on security and other priorities. The progressive case for entitlement reform is especially strong when the changes would have those with high lifetime earnings face some combination of higher taxes and/or lower benefits while shield those who most depend on the safety net from the burden of the fiscal adjustment.

The second challenge for Obama is to make the case for the inevitable fiscal adjustment to start now rather than waiting a decade or more. His supporters, for example, would prefer to come up with another $1.4 trillion in new revenue and spending cuts over the next ten years but to leave entitlements out of the mix. This amount would stabilize the national debt as a share of GDP for ten years rather than just five, but not head off the debt wave after that. Choices must be made on entitlements to address the structural problem.

The case for moving forward now on entitlement reform rests fundamentally on the notion of generational fairness. Adjustments to taxes and/or spending must be made eventually. Waiting to start reform means that some generations do not share in the burden. There is a broad consensus that people close to retirement will be shielded; putting off reform thus excuses even more generations from the combination of higher taxes and/or lower benefits than now promised.

Social Security reform provides a useful example. Waiting to reform the program until benefits cannot be paid in full would mean that workers some 40 years from now will either pay higher taxes to keep their current benefits or pay the same taxes but receive lower benefits. Either way, the net burden of the adjustment is the same for that future generation. But waiting means that the generations between now and when the Social Security trust fund is exhausted will not share in this burden. Setting in motion a gradual but credible fiscal adjustment is thus fundamentally a matter of generational fairness.

President Obama so far has focused on everything that can be accomplished without the entitlement reforms needed to stabilize the fiscal situation over time. A cynic might think that this is a strategy aimed at the 2014 elections. It remains to be seen whether the President can muster the political courage to focus instead on the long-term needs of the U.S. economy. If not, history books likely will look unkindly on his administration's fiscal legacy.

Phillip Swagel is a non-resident scholar at the American Enterprise Institute and a professor at the University of Maryland's School of Public Policy, where he teaches courses on international economics and is a faculty associate of the Center for Financial Policy at the Robert H. Smith School of Business.  He was Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009.

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About the Author

 

Phillip
Swagel
  • Phillip Swagel, an economist and academic, was assistant secretary for economic policy at the Treasury Department from 2006 to 2009, where he was responsible for analysis on a wide range of economic issues, including policies relating to the financial crisis and the Troubled Asset Relief Program. He has also served as chief of staff and senior economist at the White House Council of Economic Advisers and as an economist at the Federal Reserve Board and the International Monetary Fund. He is concurrently a professor of international economics at the University of Maryland's School of Public Policy.  He has previously taught at Northwestern University, the University of Chicago’s Booth School of Business, and Georgetown University. Mr. Swagel works on both domestic and international economic issues at AEI.  His research topics include financial markets reform, international trade policy, and the role of China in the global economy.


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    Email: pswagel@aei.org

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