Economics, Entitlements, Pethokoukis

Obama says Washington ‘doesn’t have a spending problem.’ Really?

Image Credit: White House Flickr stream

Image Credit: White House Flickr stream

In his Wall Street Journal interview with John Boehner, writer Steve Moore didn’t bury the lede:

What stunned House Speaker John Boehner more than anything else during his prolonged closed-door budget negotiations with Barack Obama was this revelation: “At one point several weeks ago,” Mr. Boehner says, “the president said to me, ‘We don’t have a spending problem.’”

On the face of it, such a statement is completely ridiculous — and a bit scary. Just have a look at the alternative fiscal scenario from the Congressional Budget Office.

In it, the CBO assumes a) Medicare’s payment rates for physicians remain unchanged from the current amounts, and b) the sequester’s automatic spending reductions required by the Budget Control Act don’t take effect — although the original caps on discretionary appropriations in that law remain in place.

Under this scenario, federal spending would average 23% of GDP over the next decade — climbing as the decade drew to a close. Not only is that level of spending three percentage points higher than average federal spending from 1987-2007, it represents a sustained level of spending unheard of in US history. The only comparable period outside of World War Two was the 1980s military buildup, when spending averaged 22.7% of GDP from 1981-1986. But at least that budget binge set the stage for lower defense spending in the future. It was temporary.

The current spendathon shows no end in sight. As long as the US can keep borrowing, it goes on and on and on — and up and up and up. The CBO:

Indeed, when you look at what drives US budget deficits over the next decade, it’s spending that’s above normal vs. tax revenue right at its historical average of around 18%.

Now, we find out later in the piece that President Obama does qualify his curious statement:

The president’s insistence that Washington doesn’t have a spending problem, Mr. Boehner says, is predicated on the belief that massive federal deficits stem from what Mr. Obama called “a health-care problem.” Mr. Boehner says that after he recovered from his astonishment—”They blame all of the fiscal woes on our health-care system”—he replied: “Clearly we have a health-care problem, which is about to get worse with ObamaCare. But, Mr. President, we have a very serious spending problem.” He repeated this message so often, he says, that toward the end of the negotiations, the president became irritated and said: “I’m getting tired of hearing you say that.”

A few thoughts on that:

1. It reaffirms that health care reform was about creating an new entitlement, not getting health care spending under control.

2. I assume what Obama means is that the long-term debt problem is due to Medicare and Medicaid, not discretionary spending. And he’s more or less right about that. According to CBO’s alternate fiscal scenario, the US will spend 35.7% of GDP in 2037 vs. 22% in 2012. Where does that 13.7 percentage point rise come from?

– Medicare spending increases by 3.0 percentage points, from 3.7% to 6.7%

– Medicaid spending increases by 2.0 percentage points, from 1.7% to 2.7%

– Social Security spending increases by 1.2 percentage points, from 5.0% to 6.2%

– Interest on the debt increases by 8.1 percentage points, from 1.4% to 9.5%

And discretionary spending? It actually falls by 2.0 percentage points, from 11.6% to 9.6%.

3. But health care spending by the government is still spending. Obama’s rhetorical legerdemain is unhelpful. It obscures the reality that how the federal government spends health care dollars — such as through fee-for-service Medicare — contributes to health care cost inflation by encouraging overuse of pricey health care services. It’s not some exogenous factor. We should be injecting choice and competition into the system wherever possible.

4. If Washington wants Main Street to trust it on entitlement reform, it should use discretionary spending as a proof-of-concept that it can improve the efficiency of government programs. Don’t just cut it across the board, reform and modernize it. Bring on the Romney Commission.

Is spending a problem? It sure is Mr. President.

34 thoughts on “Obama says Washington ‘doesn’t have a spending problem.’ Really?

  1. The President was right. He does not have a spending problem. It’s no problem at all when you can simply keeping borrowing a trillion dollars more every year. Now if the Fed ever slows down its money creation and interest rates rise, THAT could be a problem. But it will be the next president’s problem.

  2. social security is a gnat on a dogs butt in terms of it’s impact on the budget. Sometime between now and 2030, it will have to make some adjustments but it cannot, by law, pay out more in benefits than what FICA generates in revenues.

    That does not faze the anti-SS, anti-entitlement folks who want to make it part of the “problem”.

    The other entitlements Medicare and MedicAid are legitimate issues that need to be dealt with but even if you zeroed both of them tomorrow, you’d still have a 500 billion deficit and the anti-entitlement folks almost never make the case for a balance budget these days – because they know that we cannot balance it by cutting only entitlements.

    so no advocacy for a balanced budget and instead just “cut spending”.. which is code for cut entitlements but not DOD.

    in terms of health care costs, Medicare and MedicAid are affected by the same problems affecting private health care which won’t be fixed just by cutting entitlements.

    but even then, Medicare is doing a better job at keeping costs under control:

    ” [Medicare] can also achieve substantial economies of scale in terms of the prices it pays for health care and administrative expenses and, as a result, private insurers’ costs have grown almost 60% more than Medicare’s since 1970.[66] Medicare’s cost growth is now the same as GDP growth and expected to stay well below private insurance’s for the next decade.[67]”

    http://en.wikipedia.org/wiki/Medicare_(United_States)#Part_C:_Medicare_Advantage_plans

    Finally, if you like to see how we went from a balanced budget in 2000 to a trillion+ deficit now – here’s how we got there:

    link in next post……

  3. “The only comparable period outside of World War Two was the 1980s military buildup when spending averaged 22.7% of GDP from 1981-1986.”

    Thank you for acknowledging Saint Reagan’s TRIPLING of the deficit. All it took was it’s use as a construct to slam Obama.

    BTW, let’s look at the problem this way: whether through private insurance or public, health care costs are off the freaking rails in this country.

    It occurs to me that I have gotten annual increases hovering around the double digit mark for AT LEAST the past decade, if not longer.

    Someone would do well to find out where these cost inputs are coming from, because frankly, HOW it’s paid for is a secondary issue. WHY we have these costs is the real issue. Either way, it comes out of our pockets.

    • Try paying cash to get a discount. Or go to a cash only practice. You’ll be amazed at how much overhead bureaucrats and insurance companies add to costs.

      • You are joking right? Hospitals’ “retail” fees are orders of magnitude higher than hmo fees, necessary to cover charity care for the uninsured (who are then turned over to debt collectors.) A voucher/block grant cure for Medicare/Medicaid aggravates the problem. Rationing by ability to pay won’t lower the angst level on either side of the emergency room desk, which will continue as the last resort of American medicine.

    • Huh? If you knew anything about economics you’d understand supply, demand and behavior. Consumers, specifically seniors, behave like health-care is free because – to them – it largely is. Don’t expect free-market results (like the auto-insurance market) unless you employ free-market policies.

      On the deficit, why do you care about Tip O’Neil’s malfeasance? How many times did you hear that Reagan’s budget proposal was “Dead on arrival”? It was eight. All eight budgets he proposed were massively increased by the DEMOCRATS who controlled the House. He vetoed several budgets and even shut the government down in budget fights. But with Tip O’neill and the other thiefs, he had to make a deal eight times.

      You really need to stop bringing this up, because it so easy to refute. YOU are for the massive spending. You were for it then, and YOU are responsible for it now. You should at least stand up and be proud of it. You own it!

    • The Post is always good for a non-partisan chuckle. Thanks for making my day…. I’m sorely disappoint President Obama didn’t use his mandate to reverse and eliminate all those awful Bush policies.

      • there are others… all the Post did was put it into graphics. The data itself comes from CBO and OMB. The data is dead on accurate and true.

        • Sir, you don’t have a clue. Those numbers weren’t from either the CBO or the OMB. It was Ezra Klein and some other Democrat hacks trying to fake people out about Obama’s record-breaking debt increases. Read the articles before trying to comment on them.

  4. re: ” I’m sorely disappoint President Obama didn’t use his mandate to reverse and eliminate all those awful Bush policies.”

    except Obama cannot do it. All he can do is sign what Congress sends him.

    It’s true that Congress cannot agree on a budget – for 1200 days but it’s also true that the GOP continues to vote in favor of CRs to continue spending at the current levels when they could refuse to do that and force cuts at the CR level.

    this is Kabuki theater – both sides.

  5. There is also a similar article at reason.com.

    Citing OMB figures, there are some interesting numbers:

    In real terms:

    National Defense Spending: up 70.5% since 2001

    Non-Defense Discretionary Spending: up 55.9% since 2001

    Medicare Spending: up 75.8% since 2001

    Medicaid Spending: up 75.9%

    Social Security: up 38.1%

    Other Spending: up 64.1%

    Federal Government Spending as a whole is up some 110% in real terms since 2001.

    During that same time, Federal Government Receipts have risen some 33%.

    If that ain’t a spending problem, I don’t know what is.

    • Of course, then when the discussion actually comes down to cutting, no one is willing to. As Jonathan Chait likes to argue: it is hard to cut spending because there is nothing to cut.

      The right-wing is unwilling to talk about defense. The left-wing is unwilling to talk social programs.

      Both sides are in denial that there is a problem at all.

      No nation has ever been able to tax itself into prosperity. This is so incredibly self-evident that I will not waste time nor breath arguing the point (suffice to say that others more eloquent than myself have done so).

    • re: ” If that ain’t a spending problem, I don’t know what is”

      Yup. Agree but I’d have to see the context of the discussion since it conflicts with other words said.

      but two points:

      1. – when the economy tanked, so did tax revenue

      2. – the folks who want Obama to specify the cuts – themselves will not even to the point of laying out a
      framework – as Jon did in his comment that shows that both entitlements and DOD are involved.

      the folks who are saying we have a “spending problem” for the most part do NOT advocate that the cuts be across the board to include BOTH entitlements and DOD.

      Significantly, many of the GOP who say we have a spending problem – actually voted for the increases in spending for BOTH DOD AND entitlements in 2000-2006 and one would think that those same folks would then advocate that we roll back the increased spending that they themselves voted for.

      That would be a simple starting point to truly put the onus on Obama and the Dems…

      but the GOP is being feckless here.. let’s admit it.

      they simply don’t want to specify the cuts because they don’t want to include DOD and they know that without also cutting DOD we can’t balance and they are afraid of anger from the folks who want DOD spending.

      This is even more feckless when we KNOW that the GOP has consistently voted to continue spending when they vote bi-bipartisanly in favor of the CRs (where they could easily take a principled stand against continued spending).

      The GOP voted for the increased spending – DOD and Medicare..did not vote to pay for it… the supply-side theory crapped out when the economy tanked – and now they don’t want to pay off the debt created.

      • 1. – when the economy tanked, so did tax revenue

        You are absolutely right, but the story remains the same regardless of what year is chosen (the numbers just shift).

        Other than that, I have no quarrel with anything else you said.

        If we are going to talk cuts, then let’s talk cuts! No more sacred cows.

        When I am talking with clients, the hardest message to get through to them is to make cuts. Believe it or not, companies do not like to fire people or make cuts. All the time, I have to tell owners, CFOs, and the like “Look, I know you like this department” or “I know this product line is your pet project, but your company is losing money. You need to decide whether to jettison one product line that is costing you money, or lose everything.” That may be a little more dramatic than the usual, but the point remains: when you need to pay your bills, nothing is sacred.

  6. During that same time, Federal Government Receipts have risen some 33%.

    You better recheck your arithmetic. Real 2011 receipts ($1.999 trillion) are 9.7% less than 2001 receipts ($2.214 trillion) in constant 2005 dollars. That would be a revenue problem.

    • Either way, the point still remains. Government spending increased to $3.72 trillion in 2010 from $1.77 in 2001. You still got a spending problem.

      • You still got a spending problem. 2012 nominal federal fiscal spending as a percent of GDP is lower than in 1982 and 1983. Tell that to ghost of Reagan.

        You conveniently ignore the revenue problem. Either way, the point does not remain when real receipts are lower than they were a decade ago; it is unprecedented in the data series.

        • You still got a spending problem.

          When spending rises faster than revenue, that is a spending problem.

          This ain’t controversial.

          • Controversy arises when one only looks at the spending side of an income statement which Jimmy P and his acolytes are wont to do.

            In a technical sense, Obama can say that the expense side of the income statement in 2012 is lower than the same in 1982 and 1983 (the Reagan records); on the other side of the ledger, revenues for 4 years at less than 16% of GDP are shockingly low.

            In the 5 years where the federal budget was balanced or in slight surplus in the post-WW2 era, revenues were close to or equal to 20% of GDP.

            And that’s what is going to happen going forward.

          • that’s true. but when you predicated your spending based on what you thought your revenues would be – and they fail to achieve what you thought .. what then?

            That’s the question that is not getting answered.

            If you cut taxes on the premise that they’d bring in enough revenues to pay for spending – and they failed to do that – then what do you do about it?

            we’ve spent four years not agreeing on what we should do about it and in that four years, we’ve added another 5+ trillion in debt and all we are doing about it is blaming the POTUS for not cutting spending – spending that he largely had nothing to do with.

            For instance. The GOP voted for a massive new subsidized Medicare Program that accelerated the Medicare spending but now, it supposedly Obama’s fault for not cutting that increased Medicare spending – even though he did not approve it himself, in fact, was not even in office at the time it was approved.

            How do you fix that by having the folks who voted in favor of that entitlement – essentially blaming Obama for that spending?

          • revenues were close to or equal to 20% of GDP.

            And that’s what is going to happen going forward.

            What do you base that on?

            Revenues have only reached 20% 3 times: ’44, ’45 (post-war demobilization) and 2000 (tech bubble).

            You may get some bump in revenue, sure. There is room to grow. But to expect anything sustained over 18% is damn foolish. Hell, it would be unprecedented!

            Even then, with spending expected to be well over 20% of GDP this decade, and 30% the next two decades, you STILL GOT A GODDAMN SPENDING PROBLEM.

            Look, it really is this simple: If you spend more than you take in, you got a spending problem. Justify it however you want, but the fact remains.

          • In US history, there is only one period where US tax revenues remained about 18% for any significant period of time: 1995-2001. We had two bubbles going on at that time: the beginnings of the housing bubble, and the tech bubble. Unless you are advocating bubble-economics, or expecting some unprecedented levels of growth over the next decade, then expecting anything over 18% is just plain stupid.

          • Look, I am going to spell it out really simple:

            Let’s assume that you get your wish and there is 20% revenue in 2013.

            Assuming a healthy 3% real GDP growth rate, that would mean the government has $2.8 trillion coming in.

            Spending in 2013 is estimated to be 3.8 trillion.

            Assuming a rose scenario to give you the benefit of the doubt, YOU STILL NEED TO CUT ONE TRILLION DOLLARS JUST TO BALANCE THE BUDGET.

            It really is that simple: spending is the problem.

          • As long as spending remains higher than revenues, you have a spending problem.

            This is so self-evident that I will waste no more time discussing it.

  7. you STILL GOT A GODDAMN SPENDING PROBLEM

    You STILL GOT A GODDAMN REVENUE PROBLEM. The fact remains.

    Assuming historical averages of 18% revenues and 21% spending, the 2009-2012 aggregates break as follows:

    Revenue down 1060 basis points (265 bp/year)
    Spending up 1220 basis points (305 bp/year)

    On that basis spending accounts for 54% and revenues 46% variance from the historical averages.

    To suggest that spending is the only problem in the prior 4 years is an absurdity.

    • To suggest that spending is the only problem in the prior 4 years is an absurdity.

      Never said it was the only problem. Said it was the major problem.

      Again, when your spending is higher than your revenues, then you have a spending problem.

      Self-evident.

      • Said it was the major problem.

        53.5% of the problem, to be precise. Nary a word from Jimmy P about the 46.5% revenue problem.

        In any event, revenues will move to 20% and spending to 23% of GDP as the new baseline. Every one will pony up for their transfer bennies.

        • the “spending problem” narrative though is dishonest in that it implies that it we did not have one until now and Obama is responsible for it when the truth is we’ve had it every since the extra spending was approved under Bush.

          The other aspect is that tax revenues cratered from their previous levels.

          and the question not being answered is how do we pay for spending already approved under Bush that revenues did not keep up with?

          what do we do about it now and why do we call it a “spending problem” now but did not call it a “spending problem” under Bush?

          this little graphic tells where the spending comes from:

          http://www.nytimes.com/imagepages/2011/07/24/opinion/sunday/24editorial_graph2.html?ref=sunday

          it’s based on CBO data.

          if the approach was to simply roll back the spending that was last layered on – then you’d cut DOD and entitlements back to the original levels before spending was increased on both of them.

          If you actually did that, you’d save at least a trillion dollars and zero the deficit and have enough left over to buy down the debt.

          so what are we doing instead?

          well, for the last 4 years, we have blamed the current POTUS for the spending of which he had little to do with other than the stimulus.

          there is no rollback advocacy from the GOP at all. not a peep out of them on across the board roll-backs. They only want to roll back entitlement spending not DOD and they want Obama to be the one to specify which entitlement cuts – as opposed to the GOP admitting that Medicare part D was a huge mistake that they had a hand in and it should be rolled back first.

          The GOP even has a second chance in that they could refuse to vote in favor of the CRs – the continuing resolutions … they could insist on cuts at those levels also.

          this is pure and simple kabuki theater.

          the “spending problem” is the feckless GOP narrative that says that Obama created the spending, not them when the facts are simply that they did create the additional spending but they did not provide the revenues to pay for it.

          I’m not absolving the Dems of blame either. They also voted for the increased spending.

          But note again – that Obama cannot spend a dime AND he cannot cut a dime either.

          It’s up to Congress to do that and it’s got to be something that both houses will agree to before it ever gets to the POTUS desk for a signature.

          What AEI and Pethokoukis engage in here is pure propaganda, misinformation and disinformation on this issue and the unfortunate part of it is that it does work because there are too many folks who simply do not want to know the actual facts and would much rather hear a narrative that suits their own preconceived biases.

    • But these debts are older than 4 years.

      The last time we had a surplus: 1999-2000

      The time before that: 1960.

      During this time period, government revenue as % of GDP has fluctuated, but remained around the 18%, give or take.

      Dress it up any way you want it: spending is still the problem. Why? Because spending>revenue.

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