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In ‘fiscal cliff’ chatter, near-silence on entitlements

In ‘fiscal cliff’ chatter, near-silence on entitlements

Dean Mitchell/Getty Images/iStockphoto

The best evidence that Republicans are the underdogs in U.S. budget negotiations is their inability to get the mainstream media to talk about overhauling entitlements.

One could be excused for thinking the "fiscal cliff" simply is a matter of taxing the wealthiest Americans. It's not. If tax rates are a must for President Barack Obama, a meaningful signal that something will be done to lower the cost curve of Medicare, Medicaid and Social Security is a must for House Speaker John Boehner. The Washington Post's Ezra Klein explains the dynamic nicely here.

A "balanced approach" that omits entitlements isn't exactly balanced.

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Matt McDonald and Russ Grote of Hamilton Place Strategies, a Washington-based advisory firm, pointed out in a research piece last week that tax increases are "real" and any discretionary spending cuts being contemplated would be "nominal." In other words, revenue would grow with the economy, while spending cuts would remain constant.

Any agreement on those terms is "balanced" only in the short term. It also likely would create the need to go through all of this again in a decade or so. The "fiscal cliff" negotiations are being conducted within the confines of a 10-year window. And over a decade, a dab of revenue and a dollop of spending cuts would narrow the budget deficit by a reasonable amount.

Messrs. McDonald and Grote say the issue for Republicans is the 20-year window. In 2022 or thereabouts, they calculate, spending obligations would begin a sharp ascent skyward, driven by the demand an aging population will put on Medicare, the federal health program for people aged 65 and older.

"This is the fundamental Republican fear and the real issue holding back a deal," they write. "What will happen when we have to solve this problem again? Will we cut spending drastically on seniors (without any time for more gradual approaches) or will a more `balanced' approach again be pushed?"

The cynical view is that politicians will avoid entitlements at all costs. Messrs. McDonald and Grote actually see the potential for compromise around entitlements.

Research by the Congressional Budget Office shows the most-often discussed changes to Medicare, such as adjusting eligibility age, actually would raise relatively little money in the short term – suggesting the changes wouldn't be broadly felt.

"This means that a deal including entitlement reform could skew toward the rich paying more in the near term, pleasing the Democrats, and more significant and real spending cuts over the long term, pleasing the Republicans," conclude Messrs. McDonald and Grote.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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