Cut, tax, and pray
Obama’s approach to sequestration hints at how he’ll handle the long-term debt situation.

White House/Pete Souza

President Barack Obama, First Lady Michelle Obama, Vice President Joe Biden, Dr. Jill Biden, and their families attend an inaugural prayer service at St. John's Church in Washington, D.C., Jan. 21, 2013.

Article Highlights

  • Don’t kid yourself: President Obama knows federal finances are on an unsustainable long-term trajectory.

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  • The current sequester fight with Republicans hints at President Obama’s plan: Cut, tax, and pray.

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  • Besides the anemic economy, it could be that health-care inflation has slowed because of recent innovation.

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Don’t kid yourself: President Obama understands the math. He knows federal finances are on an unsustainable long-term trajectory. His Office of Management and Budget produces the same scary debt charts as Paul Ryan’s House Budget Committee (though it doesn’t publicize them with quite the same zeal). But unlike Ryan and House GOPers, Team Obama has never publicly put forward a long-term plan to prevent a future debtmageddon; he has only sketched a path for (more or less) stabilizing debt levels over the coming decade. After that, it’s “Here Be Dragons.”

But we can offer some speculation on what Obamacrats plan to do eventually. The current sequester fight with Republicans hints at his plan: Cut (defense), Tax (the middle class), and Pray (health-care inflation keeps slowing).

1. Cut defense. One assumes the president is naturally a fervent fan of the sequester’s roughly $500 billion in defense cuts. If the sequester combined with the Budget Control Act’s spending caps, defense spending will decline to 2.4 percent of GDP over the next decade, according to the Heritage Foundation. That’s roughly what formerly great military powers spend on 21st-century armed forces — it’s around Britain’s and France’s levels. America will have a European-sized military to go with its soon-to-be European-sized welfare state.

Now, Obama would surely love to use such a “peace dividend” as a future funding source for Obamacare, universal pre-K, high-speed rail, or whatever other spending ideas the White House’s Keynesian cooks whip up. Under the sequester, however, that $500 billion is used for deficit reduction. If the sequester is replaced with tax increases and other deficit-reduction measures that cut defense less, however, down the road Democrats will be free to cannibalize the Pentagon to fund other worthier “public investments,” and they surely will. If Republicans agree to permanent tax hikes to spare the military, the reprieve will only be temporary.

2. Raise taxes on the middle class. Eventually, Democrats will have to admit that raising taxes on high-income earners and small businesses, while of course necessary, is insufficient to fund the Europeanization of America. Middle-class families will have to start sending bigger checks to Uncle Sam. Last week the New York Times editorial board admitted that a main reason for Obama’s continued demand for higher taxes on the rich (this time, to replace the sequester) is that such increases “are a necessary precondition to what in time will have to be tax increases on the middle class.”

Thanks for the reminder. See, it’s easy to forget that back in the heady New New Deal days of 2009, Democrats, such as House speaker Nancy Pelosi and former Clinton chief of staff John Podesta, openly spoke about the need for a value-added tax to pay for Obamacare. Former Clinton deputy treasury secretary Roger Altman helpfully suggested an opening bid of $400 billion a year. The $500 billion in tax hikes Obama wants to help replace the sequester would help lay the foundation for such an eventual sales pitch.

3. Pray the slowdown in health-care spending continues. The president’s election-night, inaugural, and State of the Union speeches, in addition to his sequester demands, have made it clear he has little interest in significant entitlement reform. Liberals have quickly latched onto the idea that the recent slowdown in health-care-cost inflation means a) Medicare’s and Medicaid’s funding problems are pretty much fixed and b) Obamacare somehow is already working to hold down costs. Once the Congressional Budget Office also comes around to the idea, says liberal economist Dean Baker, “the really scary long-term deficit numbers will disappear.”

Which would be lovely. But here’s the problem: Besides the anemic economy, it could be that health-care inflation has slowed because of recent innovation in health plans, pharmaceuticals, and information technology. Will Obamacare’s regulations, actuarial mandates, and industry taxes result in such innovations’ accelerating or stagnating? If cost inflation speeds back up, Democrats will have to find solutions, and it may include pro-market solutions they currently consider anathema.

So, yes, Obama understands the fiscal math — and has a pretty good idea of the best way to preserve liberal priorities and make the numbers add up: cut, tax, and pray.

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About the Author

 

James
Pethokoukis
  • James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

    Pethokoukis was the business editor and economics columnist for U.S. News & World Report from 1997 to 2008. He has written for many publications, including The New York Times, The Weekly Standard, Commentary, National Review, The Washington Examiner, USA Today and Investor's Business Daily.

    Pethokoukis is an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! Champion.


     


    Follow James Pethokoukis on Twitter.

  • Email: James.Pethokoukis@aei.org

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