3 Big Lies About Cutting the Deficit

When politicians tell you it’s going to hurt, you’ll finally know they’re telling the truth.

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Maybe they're finally starting to get it in Washington. Just a couple months ago, politicians of both parties were lavishing a fresh round of tax cuts on practically every American. Now they're competing over who can take the most money away. President Obama's budget for the next fiscal year proposes $25 billion in spending cuts for 2012, plus a freeze on certain categories of spending that could save another $40 billion per year. Republicans say that's not enough, and they're aiming for $100 billion or more in cuts. Both sides are even targeting a few of their favorite projects, to prove how serious they are.

[See how to survive tax hikes and spending cuts.]

Okay, nice start. But if this is all there is, the budget deficit will remain far too big for the rest of history, and the swelling national debt will eventually crush the U.S. economy. Despite the most aggressive cuts proposed in decades, for example, the U.S. government under President Obama's budget would still spend 42 percent more than it brings in, borrowing the difference. That might be okay for a tech startup funded by Silicon Valley venture capitalists, but it's not okay for a mature industrialized nation hoping to stay ahead of China. If the Republicans got their way and wrangled a full $100 billion worth of spending cuts, they'd cut the amount Washington needs to borrow down to about 40 percent of total spending. That might forestall the day of reckoning by a month or two.

Both sides, in other words, are playing small ball, while acting as if they're undertaking heroic efforts to save the republic. The reason they're ducking and weaving is obvious: Neither party wants to admit that fixing America's finances is going to take a painful combination of tax hikes and spending cuts that will hit almost every American. The nation's most treasured and expensive programs—Medicare and Social Security—will have to be revamped, with beneficiaries bearing more of their own healthcare and retirement costs. Middle-class taxes will go up, no matter what form they take.

Under one serious plan for cutting the debt, for instance, the typical American's after-tax income would fall by 4.3 percent. For somebody making $75,000 a year and paying about 20 percent of that in federal taxes, after deductions, that's about $2,600 in lost income per year. But nobody in Washington is ready to tell you that. Instead, here are the fibs they're peddling:

The debt is the other party's fault. The formula for solving problems in Washington is to first go through an extended period of blame and recrimination, to see how badly you can damage the other party and therefore gain an advantage when election time comes. So Democrats blame the $14 trillion national debt on undisciplined spending and irresponsible tax cuts during the Bush administration, while Republicans blame the Obama stimulus plan and other efforts to crank up spending to help offset the ravages of the 2007-2009 recession.

[See how government spending skyrocketed.]

You probably know the truth: Both parties are wrong, and right. During the eight years of the Bush administration, the national debt rose by about $6.1 trillion. By the end of Obama's third year, it will have risen by another $4.8 trillion or so. There are caveats—Bush generally enjoyed a stronger economy than Obama, for instance—but it's fair to say that both parties have maxed out the government's credit without a plan for how to pay it back. The most recent evidence of that is the $860 billion tax-cut and stimulus bill passed in December, which was a joint venture between President Obama and Congressional Republicans.

The blame game matters, because there's no way that any one party will be able to solve the debt problem through its own pet initiatives, even if a single party controlled the White House and both chambers of Congress. Spending cuts alone will never do it, nor will tax hikes on businesses and the wealthy. Divisive battles over the past perpetuate partisan bickering, when what's needed is cooperation. So while Republicans and Democrats focus on scoring political points, the problem simply gets worse.

The pain can be passed to somebody else. Democrats want to tax the rich. Republicans want to cut subsidies for supplicants and deadbeats while forcing millions who rely on government funds to migrate to the private sector. The basic premise behind most of the spending cuts outlined so far is that they can happen in ways that won't affect mainstream Americans, letting the middle class off the hook.

[See how buying a home is likely to change.]

That's nonsense. The middle class—all of it—absorbs the bulk of government spending, through programs like Medicare and Social Security, tax deductions for mortgage interest and employer-paid healthcare benefits, unemployment compensation, decent roads and other infrastructure, and the stability that comes from a strong national defense. The biggest and most popular programs need to be cut. Tax deductions claimed by millions need to be eliminated or reduced. There may even need to be a national sales tax on everyday items. Putting all this off may actually be a disservice to the middle class, because the longer we put off a solution, the deeper the spending cuts and the bigger the tax hikes will need to be.

Serious budget cutters know this, they just don't feel like mentioning it right now, lest voters think unkindly of them once the big election in 2012 comes around. When he was in the Congressional minority, for instance, Republican Rep. Paul Ryan of Wisconsin produced a "roadmap for America's future" that called for the partial privatization of Medicare and other changes to cherished programs meant to cut costs and keep them solvent. But those ideas haven't yet surfaced in any of the Republicans' official debt-cutting plans, and Ryan, who's now chairman of the House Budget Committee, didn't mention his ideas for cutting Medicare or Social Security when he gave the rebuttal to President Obama's State of the Union address. Maybe they don't seem like such good ideas now that Republicans control the House and voters are paying more attention to them.

Voters are noble. Politicians speak of "the American people" in reverent tones, as if they possess profound collective wisdom and would never stoop to greed or selfishness. But if you ask the American people how to solve the debt problem, they basically say, cut everybody else's benefits but leave mine alone. They may be even more gridlocked than Congress, in fact.

In surveys by the Pew Research Group, Americans seems to be aware of the debt problem, yet they still want to see spending increases—rather than decreases—in 16 out of 18 major categories, with education at the top. They also oppose tax increases by a signification spread. Baby Boomers in particular are strongly opposed to many of the measures that could go the farthest toward paying down the debt, like reducing some of the biggest tax deductions and raising the retirement age at which people qualify for Social Security. It's not surprising that boomers oppose such things, since they'd bear the cost directly. But they'll feel even deeper pain if the debt bomb explodes and some of the cherished programs they rely upon have to be scaled way back.

[See why low inflation seems high.]

To be fair, Americans don't have a leader at the moment who's telling them the truth about the nation's finances, detailing what needs to be done, explaining how the burden will be shared fairly, and convincing voters that shared sacrifice is in everybody's interest. So they're skeptical and selfish. Sooner or later, however, we're all going to have to give. When you start to hear that message coming from Washington, pay attention: It might signal an outbreak of truth.

Twitter: @rickjnewman