Debt Ceiling Deal a Prelude to Ultimate Default

by: Peter Morici

President Obama wants a big deficit reduction deal, a long term solution to the nation’s unbalanced finances. Yet what the President and Republicans propose — even if both could accept much of what the other offers — would only delay the inevitable. Like Greece, America’s finances will grow worse and worse.

The United States is suffering from not enough growth. At 2 percent, GDP is advancing at the pace of worker productivity; hence, jobs creation is near zero, wages are declining and tax revenues lag growth in government expenses. The big budget busters — Medicare, Medicaid and Social Security — will continue to far outpace GDP and tax revenues.

What comes out of budget negotiations could buy time through 2012, but will make the growth problem worse, not better.

The President has odd ideas; for example, targeting higher taxes for families earning more than $250,000 a year. Those include many Schedule C small businesses, and those deriving incomes from family-owned corporations, where couples often work a combined 100 hours a week, have much capital at risk and create many of the new jobs — at least when not scared into not hiring by presidential rhetoric about millionaires.

This arrow to the heart of small business would yield perhaps $80 billion in revenue against a $1.6 trillion annual deficit. That’s if entrepreneurs and employees with large incomes do not, as is likely, invest and work less. Adopt that fiscal Rx, and tax revenues will be less and budget problems greater in the future.

Obama wants to single out oil companies. Specifically, U.S. businesses get credit for foreign taxes paid (not royalties but corporate taxes paid) against their U.S. tax liabilities; he wants that curtailed for oil companies. Already, foreign companies, unlike U.S. companies, are not taxed by their home governments on oil they produce outside their home country. If the United States follows Obama’s prescription, even more exploration and development abroad will move to competitors like BP and Royal Dutch Shell (NYSE:RDS.A). U.S. imports from non-U.S. owned corporations will rise, and future U.S. tax revenues will be smaller and budget problems worse.

Similarly, all U.S. businesses can receive some tax credit for domestically based production and employment. The President wants that taken from oil companies who are also refiners and manufacturers, and undertake considerable R&D. Follow that Rx, and future domestic production, employment and tax revenues will be smaller and budget problems worse.

On healthcare, many items Republicans are pushing merely shift costs to state governments and private insurers, who must raise taxes or premiums, encouraging more offshore production, fewer jobs and less tax revenues, and worsening future budget woes. The pricing system — and signals prices give to consumers about healthcare choices — and bureaucratic costs, the patent system and torts burdens are widely out of control. Germany, Holland and the United States have private insurance systems, though government reimbursements are about 80 percent in Germany and Holland and only 55 percent here. Those competitors spend 12 percent of GDP on health care, the United States about 19 percent.

Germany per capita drug costs are $400 per year, while in the United States those are $800. That filters through to the cost of doing business, whether through taxes or insurance premiums. No small wonder why Germany doesn’t have nearly the problem competing in global markets the United States does.

Little being bandied by Republican budget cutters will fix that. Habitually Republicans say, “Who will pay for the R&D?” More accurate to ask, “Who will pay for unproductive tweaks in drug formulas to extend patents and big TV ad budgets to discourage use of generics?”

Neither the President nor Republicans want to really fix Social Security. Americans are living longer and could work longer, but the next big thing will be to change the consumer price index used to adjust benefits from a fixed weight formula, which is based on purchasing patterns several years old, to a chain weighted index, which accommodates changes in consumer behavior.

For the general population, the former overstates inflation, and the latter is more accurate. However, for the elderly, both measures understate inflation, because the elderly use disproportionately more health care services. This adjustment would victimize folks who live into their late 70s and 80s, and buys a few years time, after which the growing burden of Social Security on the budget will be tougher to fix.

Ever more Americans are employed in tasks that permit folks to work until age 70. Somehow, we have gotten into our heads work is bad for old people; it’s not. A good diet, exercise and work everyday are the best Rx for health and happiness.

Readers tell me many blue collar workers can’t work past 60. We can’t accommodate the entire retirement system for what is each year a smaller share of the workforce. Instead, find physically less stressful work for older blue collar workers.

Payroll taxes are already too high and destroying jobs. Raising the retirement age to 70, then indexing to longevity, would both make the system solvent and permit some permanent reductions in payroll taxes.

Don’t expect the President to ask Americans to eat those peas anytime soon. Instead, Presidents and pundits will make excuses for slow growth that doesn’t have to be. Americans will feast on budget deficits and debt ceiling crisis after the next election, and the next, until like Greece, the United States finds no way out but default.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.