Last evening, participants in the “Biden Budget Talks” leaked that the group seeks now $4 trillion in debt reduction during the next 10-12 years.Yet, reports proliferate that Medicare, Medicaid, perhaps Tricare, and Social Security are off-limits.
The arithmetic doesn’t work if the rumors are true.
More likely outcomes will be along these lines:
- Small changes to non-medical, non-Social Security, entitlements (pensions, farm subsidies, etc.);
- Assumption of a freeze of some length on domestic appropriated accounts (12-14 per cent of federal expenditures);
- “Process” changes that will create the promise of automatic spending cuts in the future in Medicare, Medicaid, defense spending and tax expenditures.
We will be very pleasantly surprised if the Biden talks produce fundamental re-structuring of the nation’s fiscal mess. Not only is time running out for a comprehensive legislative package that reforms Medicare and Medicaid (the greatest drivers of future fiscal collapse), but it is not in the self interest of Democrats in general to produce meaningful Medicare reform when so many of them in the House and Senate want to use it as an attack tool against their Republican opponents in the 2012 election cycle.
Our reaction is similar to that of Senate Budget Committee Chairman Kent Conrad earlier this week when he expressed his fear that the Biden talks would produce nothing of substantial fiscal consequence.
Conrad has been around the budget block many times and he can sniff out a bad deal when he gets near one. As for the “pledge” that spending cuts will be three times bigger than any revenue changes, history presents a lesson. Way back in antediluvian times (the mid-’80s), Congress promised then President Ronald Reagan that it would produce three dollars of spending savings for each dollar of tax increases. The actual package was more like one for one when all the gimmicks and spin were squeezed out of the package and people who knew Reagan best said that he knew after the fact that the numbers were phoney.
The recent admission of reality by the American Association of Retired Persons (AARP) that Social Security and Medicare really are on the reform block is good news. AARP wants to have a seat at the table in the post-2012 election world when Congress may get serious about such entitlement reform. Its traditional opposition to any changes in entitlements has been a huge stumbling block to progress on the fiscal front; indeed, one can make a pretty strong case that the spending indulgence for seniors that will flood the nation in coming years occurs because of the counter-productive actions of AARP.
Someday not far off, real entitlement reform will force itself onto the Congressional agenda. It won’t be this year nor next. It may well be 2013. And, given turmoil in overseas markets and economies, America may continue to be blessed by strong demand for the “safe haven” of our sovereign debt.
But the patience of credit markets is not eternal. At some point market participants will demand real changes in American debt accumulation. That demand could be in the form of very unpleasant interest rates demanded on our sovereign debt.
Market patience concerns not just serious American policymakers. This morning, the International Monetary Fund warned both the Europeans and Washington, D.C., that “they are playing with fire” unless they take immediate steps to reduce deficits.
Jose Vinals, director of the IMF’s monetary and capital markets department, continued: “You cannot afford to have a world economy where these important decisions are postponed because you are really playing with fire. We have now entered very clearly into a new phase of the crisis, which is, I would say, the political phase.”
In addition, the IMF’s new economic forecast predicts slower global and American economic growth in the next 18 months than its original forecast. Slower growth, higher unemployment, increasing spending, less revenue — no wonder most Americans who live outside Washington, D.C., have so pessimistic a view of the future and so little faith in the federal government.
Our view is that if the Biden talks produce the minimal result we predict, Director Vinals’ fears will materialize more quickly and perhaps more dramatically than most Americans anticipate.