WASHINGTON -- The largest challenge President Obama faces is job-creation. But the largest issue over which the president and Congress have actual control is the deficit. So the first clear comparison between Obama and newly empowered Republicans will be a contest of credibility on the budget.
After presiding over budgets adding $3 trillion in debt, one would think Obama is at a disadvantage. But one, as usual, has no idea what one is talking about. On spending, Obama will attempt to outflank Republicans to their right.
With Jack Lew and Gene Sperling in charge of its economic policy, the administration's Clintonian direction is clear. It will seek higher revenue, cuts in defense, spending caps and more aggressive health care price controls. When measuring deficit reduction, the last is the most important. It is the combination of cost inflation, an aging population and expansive health entitlements that push America toward the fate of Greece. Unless this problem is addressed, no tax increase or cut in discretionary spending will cause federal outlays to flatten at a sustainable percentage of the economy.
The Congressional Budget Office will report Obama's health care price controls -- payment cuts to doctors and hospitals in Medicare and other programs -- as large, long-term budget savings. The CBO is the most lenient sort of referee, giving credit for a proposed play instead of an actual score. But such reductions are not likely to happen. Every year Congress passes a "doc fix" to avert much smaller cuts. Obama's health care law already pushes Medicare disbursement rates below Medicaid rates -- a level that currently makes it difficult for Medicaid patients to find doctors willing to treat them. The Medicare actuary predicts that cuts already passed by Congress will cause about 15 percent of providers to become unprofitable. Proposing even more drastic reductions is more of a ploy than a plan. But it would look good on paper.
The Republican budget, meanwhile, will include major domestic discretionary cuts, mostly outside of defense, amounting to between $1 trillion and $2 trillion over 10 years. The proposed repeal of Obama's health care law counts many advantages, but deficit reduction is not one of them. So if Republicans don't touch Medicare, their budget approach -- again, on paper -- will have less long-term debt reduction than Obama's.