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Democrats offer the wrong solutions to the budget deficit

Raising taxes and protecting entitlements while cutting defense will make America less secure

By Peter Morici

12:28 PM EDT, November 1, 2011

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Whether the Joint Select Committee on Deficit Reduction — the so-called supercommittee — reaches a deal to reduce the federal deficit by at least $1.2 trillion or stalemates on Nov. 23, Democrats appear intent on handicapping the national economy with higher taxes and imperiling national security by cutting defense. Those are the wrong places to solve the nation's budget woes.

In 2007, just prior to the financial crisis and when Democrats took control of Congress, the deficit was a manageable $161 billion. The wars in Iraq and Afghanistan were ongoing, and the Bush tax cuts and prescription benefits for seniors were in place.

In 2011, two years after the recession ended, the deficit is $1.3 trillion. Spending is up $847 billion, and additional temporary tax cuts — such as the payroll tax holiday — account for the rest. Of the $847 billion, only $62 billion was necessary to accommodate inflation; Social Security, health care and other entitlements account for 78 percent of the rest.

Repeatedly, President Barack Obama and Democratic Senate Majority Leader Harry Reid have claimed Social Security is not contributing to the deficit, but the program began paying out more than its receipts in 2009, and the Social Security Trust Fund will be entirely depleted by 2036.

Federal and state budgets are burdened by the least-effective health care and education systems among industrialized countries. For example, the German and Dutch private systems spend about 50 percent less per capita and accomplish better outcomes.

Progressive education advocates equate reform with more money, even though the United States has one of the most expensive systems on the planet and gets subpar results — test scores are lower and graduates lack job skills employers seek to build globally competitive enterprises.

Raising taxes to accommodate these shortcomings, instead of taking steps to fix them, would permanently burden the U.S. private sector with more overhead (higher taxes, health care premiums and tuition) than most foreign economies bear, making economic recovery and adequate job creation next to impossible.

Real reform requires spending less, not more, by ferreting out the kinds of waste that foreign health and education systems do not impose on taxpayers and businesses.

Yet, the Budget Control Act of 2011 requires if the supercommittee can't reach a deal — and Democrats remain steadfast they will block any deal that cuts federal health care spending or does not raise taxes — then $1.2 trillion will be cut from other discretionary programs and defense.

Because the calculations already take into account savings from ending the wars in Iraq and Afghanistan, the law would require that the base defense budget — defense spending minus the costs of troop deployment — contribute 42 percent of the $1.2 trillion. This is not practical.

U.S. military hardware is aging and becoming less effective — sons are manning fighters flown by fathers, and the typical Air Force bomber is 34 years old. The number of Air Force fighters, down from 3,602 in 2000 to 1,990 in 2011, will fall to 1,739 at current funding levels. Similarly, Navy ships are down from 316 to 288 and will fall to 263. The Budget Control Act would reduce those much further.

Cyber warfare and the problem of China, which is building a navy to challenge the United States in the Pacific, do not shift U.S. security challenges from one venue to another but rather add to them. Specifically, U.S. and allied dependence on Middle East oil will continue for another generation — even with the best efforts to develop alternative energy resources — and U.S. naval assets cannot be shifted from the Persian Gulf to counter China's buildup in the Pacific. Economic and political upheavals in Europe and North Africa make the U.S. naval presence in the Mediterranean and North Atlantic even more vital.

Current Chinese military spending is only about 17 percent of U.S. base budget outlays, but China's currency is widely acknowledged to be undervalued; 27 percent is more realistic. Based on recent growth, China's military spending would be 66 percent of U.S. levels in 2021 without the proposed budget cuts and 60 percent with them.

China does not have troops, aircraft and naval assets tied up around the world with established commitments, and with defense spending at 60 percent of U.S. levels, it would seriously challenge the U.S. guarantee of security to Taiwan, Japan and even Australia.

To get the economy going and meet U.S. security commitments, the budget deficit must be tackled, but that begins with finally recognizing that Social Security, health care and education must be reformed to absorb fewer — not more — national resources.

Peter Morici, a professor at the University of Maryland's Smith School of Business, is former chief economist at the U.S. International Trade Commission. His email is pmorici@rhsmith.umd.edu. Twitter: @pmorici1.