Obama's Plans May Be Doomed by Unchecked Spending
Commentary by Albert R. Hunt
April 27 (Bloomberg) -- "A hundred million there, a hundred million here, pretty soon, even in Washington, it adds up to real money," President Barack Obama declared last week, paraphrasing a line attributed to the late Republican Senate leader, Everett Dirksen.
The context is a looming policy and fiscal clash: Obama's economic, energy, health-care and education initiatives are expensive, and the U.S. faces trillion-dollar deficits as far as the eye can see.
The president can make a compelling case that these priorities are urgent and can help revive the economy. Still, those initiatives, and a strong economy, may be unattainable without fiscal discipline elsewhere.
Dealing with the cosmetic stuff -- curbing congressional pet projects or eliminating fraud and abuse in executive agencies -- is fine, if insignificant. Obama needs to deliver on big-ticket luxuries like farm subsidies, tax breaks and a down payment on entitlement reform.
There's little reason to think congressional Democrats or Republicans are serious about such sacrifices. This isn't so much about ideology or partisanship; it's about entrenched interests and habits.
"I am very skeptical that Congress will go along with any retrenchment," says Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office.
Reason for Pessimism
A look at recent congressional actions gives cause for Reischauer's pessimism:
Farm subsidies: Obama, a Democrat, proposed eliminating federal subsidies for farms with more than $500,000 in revenue and capping all payments to any single farmer at $250,000.
These, coupled with changes in crop insurance and smaller items, would have saved more than $15 billion in revenue over a decade. In fiscal and fairness terms, the issue is simple: A government report last year found that more than 20,000 people with gross income in excess of $500,000 got subsidies.
The politics aren't that simple. House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat, called the idea "stupid," and Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, more diplomatically called it a "mistake." Farm lobbyists complain that ending the subsidies would contribute to the volatility of food prices.
Blue Dog
Peterson is a member of the Democratic Blue Dog caucus, which advocates budgetary moderation. Conrad is a consistent critic of chronic deficits.
As another congressional leader once proclaimed, all politics is local, and cracking down on federal support for rich farmers was nixed.
More government investment in agriculture is needed. That industry was shortchanged in Obama's record economic-stimulus package. Yet that will be hard to do as long as wealthy farmers are getting subsidies.
Estate Tax: During budget deliberations, the Senate voted 51-48 to endorse a proposal to sharply reduce estate taxes paid by the wealthiest Americans.
If such a measure were to become law -- Obama is opposed - - it would drain the Treasury of $91 billion in revenue over a decade and reduce charitable contributions, according to Michael Graetz, a Yale Law School professor who was a top Treasury tax expert in the first Bush administration. It would also exacerbate wealth disparity in America.
Usual Excuses
The tax cut was supported by every Senate Republican, as well as Democrats like Blanche Lincoln of Arkansas and Evan Bayh of Indiana. They trot out the usual rationales: It will enable small businesses and family farms to be passed down to heirs.
The facts are different: The Senate proposal calls for increasing the exemption from estate taxes to $10 million per couple from $7 million.
Studies show that under the $7 million exemption, the tax affects fewer than 1 percent of all estates in America, and only a handful of farms and small businesses. Estate-tax opponents, economists and news organizations search in vain to find family farmers hit by the tax.
A hypothetical example: An affluent American dies, leaving an estate, after fees, of $10 million. Under the current provisions, he decides to give $2 million to charity, and $8 million to his children and grandchildren. He'd owe taxes of $450,000. (If he gave $3 million to charity, he'd owe no taxes.)
Charities Lose
Under the Senate plan, he might decide to give $1 million to his church or synagogue, alma mater or local hospital, and $9 million to his relatives. There would be no taxes owed.
The government and charities would be the losers, while his offspring would benefit under what economist Irwin Stelzer once called "affirmative action" for the rich.
Social Security: The Obama administration knows that curbing the growth of entitlements is critical and that Social Security is an easier target than Medicare.
Former President George W. Bush's attempt to institute private accounts was ill-conceived. The stock market crash has killed that approach for the foreseeable future.
Not That Hard
Yet a Social Security "fix," which should command support from the center of both parties, isn't very elusive. It could involve progressive indexation of benefits so wealthier retirees get less, small tax increases, and a gradual increase in the retirement-eligibility age as Americans live longer.
Many congressional Democrats, including the leaders, are as rigid in resisting this as Republicans are on taxes. They have told the White House: Don't even think about setting up a commission to deal with Social Security or other entitlements.
On each of these measures, supporters avoid discussion of the fiscal costs and wrap themselves in buzzwords: family farms, small businesses, the "death tax," protecting seniors. "Most of it is about labeling," Reischauer says.
The small stuff, such as Obama's directive to his agencies to cut a total of $100 million from their budgets, may score political points for the president. He's talked a good game on some of the bigger-ticket items, while showing no inclination to fight for them. His apologists say he has higher priorities.
If it persists, this will produce one of two train wrecks: decimating his health-care and energy initiatives or imperiling a long term, fiscally sound economy.
(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)
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