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The Next President’s Budget Crisis

This week, former Treasury secretary Robert Rubin and some other prominent Democrats announced the formation of yet another think tank, the Hamilton Project, named for Alexander Hamilton, the first Secretary of the Treasury. It appears that Democrats are starting to feel confident about retaking the White House in 2008 and are moving to build a foundation of issue analyses and policy initiatives that their candidate can run on and, if elected, use to govern. The Hamilton Project’s first papers put forward some ideas for improving education and saving by low-income households.

These proposals are fine as far as they go. But the proverbial elephant in the living room is the budgetary situation, which is going to make it very difficult for the next president to do much of anything that costs money. The first baby boomers turn 62 in 2008 and most are expected to start drawing early Social Security benefits almost immediately. Three years later, when they turn 65 — still in the first term of our next president — they will become eligible for Medicare.

Both Republicans and Democrats have avoided dealing with this elephant because to seriously do so would require confronting a very unpleasant reality — that only massive spending cuts or tax increases can prevent a financial crisis. Each party fears being pilloried by the other if it dares to even hint at the necessity of benefit cuts and tax increases.

Consequently, both parties proceed with the delusion that relatively modest, and politically painless, fiscal adjustments can keep the government running. Democrats like to believe that the Bush tax cuts are all that is standing in the way of every policy they would like to see enacted. But even if all those tax cuts disappeared tomorrow, the money that would come in would provide only a drop in the bucket of what is needed to deal with looming fiscal problems. It would cover maybe a tenth of the spending that is already in the pipeline.

Republicans have their own delusions. To hear them talk, all we need to do to fix the budget is get rid of pork-barrel spending — perhaps by giving the president line-item veto power. But as a new report from Citizens Against Government Waste documents, this, too, would provide only a drop in the bucket. Getting rid of all pork-barrel projects in the federal budget would reduce spending by only $29 billion this year (a trivial amount in a $2.5 trillion budget). Moreover, as a recent Congressional Research Service report explains, the president doesn’t need a line-item veto to cut pork from the budget. He could, if he wanted, cancel 95 percent of earmarks today, because they are not actually line items in the budget. They are Congressional suggestions that he may ignore at will.

What is critically needed is for everyone to agree on the nature of our long-term budgetary problem and the realistic options we have for dealing with it, on both the spending and revenue sides. We cannot avoid a future financial crisis just by raising taxes or by cutting spending. And we will get nowhere by avoiding the elephant of entitlements. That means we must confront the all-powerful AARP, which grows stronger each day as an increasing portion of the population turns 65. (Over the next 25 years, according to the Census Bureau, the percentage of the population 65 and older will rise by 60 percent.)

I’m all for cutting spending. As a libertarian, I think the federal government does far too much, and if I had the power, I would slash spending to less than half what it is. But I don’t have that power, and I would not support giving anyone that power because it cuts both ways. And I have worked in Washington too long to delude myself about what budgetary changes are attainable. Those on both the left and the right need to come up with ideas that appeal to lawmakers across the political spectrum.

I continue to believe that financial markets will one day wake up and notice the deficit. Like Claude Rains’s Capt. Renault in “Casablanca,” they will be “shocked, shocked” to discover this problem. But they could put irresistible pressure on both parties to act meaningfully. Whatever their public pronouncements today, Democrats and Republicans alike should be considering their bottom-line positions. When the markets finally react, whichever side is best prepared will have the greater chance of controlling the agenda and seeing its policies enacted.