Bad Timing

This week our Federal government has enacted a sequester due to their stalemate over the Federal budget.  The left believes we need to remove tax deductions for the rich; while the right believes we should focus solely on reforming Medicare, Medicaid, and Social Security, negatively referred to as entitlements.  Until this standoff is resolved, we are held hostage with threats of government layoffs, shutdowns, and economic decline.   

The truth is, both sides are right.  If done correctly, these solutions could become the perfect grand bargain.  In fact, Barack Obama and John Boehner came very close to agreeing on it.  We now know that this solution is not very likely, as it fails to appeal to the extremists.  The actual solution will probably look more like a series of deadlines and capitulations that slowly chip away at the problems.  In the meantime I need to offer a few complaints and conclusions about our congress. 

First of all, why are entitlements the primary focus of the right?  Believe it or not, these programs have very little to do with the national debt.  All of the entitlement programs (Social Security, Medicare, and Medicaid) have operated at or near break even throughout the Great Recession.  The largest, Social Security, is fully funded through 2036.  Yes, it is true entitlements are projected to go under water in the next 10 years due to a huge increase in the number of elderly who will enter the system, but the great distraction of entitlement reform is that if they had been corrected 10 years ago it would have had very little effect on the current deficit.  Because entitlements only threaten future debts, making major moves to correct entitlements today would amount to bad timing.  As it stands, the CBO predicts our national debt will actually decrease if we make no changes to budgetary law over the next 10 years.

So, why won’t Democrats go to work on entitlements anyway?  Several viable proposals have been presented, but the Democrats prefer to stand off instead of doing what is prematurely asked.  I have a theory:  The most likely solution to entitlement futures is to raise the tax for entitlements, specifically on the wealthy.  Note that this is not necessary today, but it will be necessary 10 years from now.  Most entitlement revenues do not apply to those earning over $120,000 per year, so an easy solution to the future shortage is to raise the exemption for higher wage earners while also instituting an incremental raise in the retirement age.  In other words, future high income earners will pay a little more, while future workers will wait a few more years to retire.  Problem solved, right?  Wrong.  If the Democrats make this move before correcting budget deficits, Republicans will scream that Democrats have raised taxes on the rich - not once, but twice - while making no correction to the deficit!  And it all happened because Republicans forced the Democrats to raise revenue on systems that did not need to be fixed - at least not yet - and had very little to do with the national debt.

Republicans know that it is inevitable that this solution for entitlements will be needed over the next 10 years, but they don’t want to be the party who does it.  It is vitally important for the GOP to make sure the left is blamed for raising taxes while also raising the retirement age, and making no progress on the deficit.  Who could support a party who gives you so much less for so much more?  In fact, this bad timing is so important that Republicans are willing to hold other programs hostage until this dirty work gets done.  In a political climate full of scare tactics and standoffs, the most important thing for the GOP is to generate bad timing for the left, so the Democrats will appear as wrong as possible.

Tony F.   2013