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.
"The fact is," says Yuval Levin of the Ethics and Public Policy Center, "Medicare is going to crush the government, and if Republicans leave it unreformed then the debt picture is very, very ugly. They might never -- literally never -- show the budget reaching balance. Not in the 10-year window and not if they take their graphs out a hundred years. Obama could probably show balance just past the budget window in the middle of the next decade because of the massive Medicare cuts he proposes, even if in practice they will never actually happen."
But major Medicare reform is politically risky. Republican plans would provide generous but limited subsidies to individuals to purchase their own health insurance, controlling costs by providing premium supports on the basis of need, and by encouraging competition among insurers. These are large changes, with no immediate chance of passage -- leaving Republicans with a lively, internal debate on their next step. Do they take up an ambitious Medicare reform -- or allow Obama to get to their right on the budget?
Republicans should be able to make a strong case for reform. Price controls in Medicare -- if actually implemented -- would cause immediate pain. Republican plans would kick in more gradually -- touching no one who is over 55 today. The Democratic approach to Medicare cuts would give doctors and providers less and less money while expecting them to cover the same services. "In reality," says Levin, "providers won't just provide the same care for less money -- some will stop taking Medicare patients, some will go out of business, and some will reduce the level of care or amenities. That's what we see in every system that takes this approach to cost control: waiting lines, dirty unsafe hospitals with horrible food and amenities."
Republicans may have the better policy case. But Obama has an easier political task. He can promise to keep the same Medicare system at a lower cost with fewer cuts in other programs -- while attacking more drastic Republican domestic cuts and the voucherization of Medicare.
If Obama takes this path, he may win the political day -- but he would lose the contest of credibility.
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