Public Finance Scholars Hope for Candor on Costs in Obama Speech Tonight

September 9, 2009

Echoing economist Henry Aaron, two public finance scholars have warned that the nation is unwilling to foot the bill for massive new health programs.

Alan J. Auerbach is a professor of economics and law at the University of California, Berkeley, and William G. Gale is co-director of the Urban Institute-Brookings Institution Tax Policy Center. Their new commentary reminds Senator Baucus, President Obama and other lawmakers of how deep in red ink the federal government already is.

On the spending side, they call for cuts in government spending, and they remind lawmakers and the public that our current government spending on health care — Medicare and Medicaid — is massive and growing at an alarming rate.

Medicare and Medicaid have been growing much faster than the economy and are projected to continue doing so. Spending on the two programs rose from about 1% of GDP in 1970 to more than 6% today; it is projected to grow further to 9% of GDP by 2030 and 13% by 2050. The cause is the increasing share of the population that is elderly and continuing increases in medical costs.

On the tax side, they say that the new taxes suggested by lawmakers so far are totally inadequate to pay for such a huge new entitlement as the Congress is contemplating.

We would need to double our income tax collections to solve our fiscal problems using the income tax alone. … This is a difficult problem. It is not hopeless, but it is far too large to be addressed through narrow measures alone, such as taxes on those with very high incomes or on soda consumption.

Expressing their hopes for the President’s speech tonight, they ask for candor:

Achieving such support [for broad new taxes and/or major spending cuts] could begin with some frank talk about the costs, as well as the benefits, of health care reform, and the size of the long-term gap that health care reform alone cannot solve.

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