The Economy on the Brink: An Interview with Heritage’s Curtis Dubay

August 25, 2011 07:44

“I see a President who wants to punt these issues to his second term, assuming he gets one. No one knows what his plan is. I know what his plan is for Medicare—it’s to ration, through his Independent Payment Advisory Board, IPAB—which was passed as part of Obamacare—basically, restrict the amount of services that seniors can get through Medicare, and restrict how much the government will pay for the services that it does pay for.”

By Roger Aronoff

America is quickly running out of time to get its financial house in order. With the debt-ceiling deal passed earlier this month, “we missed a major opportunity… by not cutting more, and by not putting together a plan that actually gets at the root cause of our debt problem, which is overspending, mainly by our entitlement programs—Social Security, Medicare, Medicaid.” That is the view of Curtis Dubay, an economist and Senior Policy Analyst at the Heritage Foundation, a leading conservative think tank in Washington. Dubay has written extensively on taxes, and previously worked for PricewaterhouseCoopers.

In an extensive interview with Accuracy in Media, conducted shortly after the deal was reached in Congress earlier this month, Dubay said that “once a nation gets [to this] level of debt, they start to encounter major problems. The international credit markets start doubting whether that country ever has an intention to pay that money back. We’re certainly treading into dangerous territory.”

The Heritage Foundation has laid out a specific plan to balance the budget within a decade, and to keep it balanced, without raising taxes at all. They don’t buy into President Obama’s idea that any plan going forward must include tax hikes, unless by tax hikes he means increased revenues generated by a robust economy, with lower tax rates across the board. The key to balancing the budget, according to Dubay, is entitlement reform. In the interview he laid out the key elements necessary in any such successful reforms.

Dubay also explained the inherent contradiction between Obama’s call for tax reform, and his determination to end the Bush tax cuts by allowing them to expire at the end of next year.

We also discussed the role of the Tea Party in today’s political process, the problem of baseline budgeting, and the impact of the way that Washington went about the so-called bailout of the automobile industry.

You can listen to a podcast of the interview, or read the full transcript, here. Below, in italics, are excerpts of the transcript:

As part of our [Heritage Foundation] plan, we balanced the budget in ten years, kept it balanced in perpetuity, and we did it without raising taxes one dime.  We were able to do that because we do reform Social Security and Medicare and Medicaid to make them more affordable, to make sure they’re going to be available to future generations.  Unlike some of the political programs that have been put out, we do not exempt current seniors.  We change those programs in the near future, because they’re simply unaffordable in the future, and they’re unaffordable right now.  What we do is, we take Social Security and Medicare and we turn them into what they were originally conceived to be, which are insurance programs for seniors who need them most.  Right now, Social Security and Medicare are open-ended entitlements for any senior old enough to qualify.  Instead of that system, we say, “No, we’re only going to give Social Security benefits to those who need it most.”  It’s called “means-testing.”  We’re going to phase out benefits for wealthier seniors.

The purpose of this plan is twofold.  One, it fixes government finances, and, second, it changes the entitlement mentality, that we’re going to provide for everyone once they reach a certain age level.  These programs were originally provided to be social safety nets, to be insurance programs to help keep seniors out of poverty, and that’s what we intend to bring them back to.

Back in the 1950s and 1960s, there were five workers for every retiree receiving benefits.  Today, there are only three workers for every retiree, and in just a few short years it’s going to be two-to-one.  There just aren’t enough workers paying into the system to pay the benefits for retirees.  It just can’t be done.  We’re seeing how this plays out, the collapse of the welfare state, in Greece and in other European countries.  In a lot of ways, we should be thankful for them.  They’re showing us our future.  It used to be that our future was far enough down the line that we could keep kicking the can, but the current recession and the enormous spending binge that President Obama has engaged in has brought the future to today.  We don’t have the time anymore to wait.  These programs need to be reformed now so we don’t experience our own Greek future.

I see a President who wants to punt these issues to his second term, assuming he gets one.  No one knows what his plan is.  I know what his plan is for Medicare—it’s to ration, through his Independent Payment Advisory Board, IPAB—which was passed as part of Obamacare—basically, restrict the amount of services that seniors can get through Medicare, and restrict how much the government will pay for the services that it does pay for.  I don’t know what his plan is for Social Security.  I believe it’s just to raise taxes—basically, uncap the Social Security tax.  Even that doesn’t get us close to making Social Security actuarially sound going forward.  So he’s going to hide his plan, he’s not going to talk about his plan—because he doesn’t have one.  All the while, every day, we wait, it gets harder and harder to fix these plans, and we get closer and closer to bankruptcy.

It’s possible that we will actually spend more, in absolute dollar amounts, next fiscal year than this year, and Washington will still say it “cut spending.”  I think that’s an important thing that happened as part of this debt ceiling debate is that—especially—the Tea Party folks have kind of been illuminated to these baseline budgeting shenanigans that go on here in Washington, where a “cut” is basically a reduction in growth, not an actual cut.  I think maybe we’re starting to see the beginning of the end of baseline budgeting.  It’s something that is long overdue to go away, because it makes it very difficult for us to actually have real reductions in government spending.

Well, not passing a budget is an abdication of their Constitutional responsibility.  It’s a complete and utter breakdown in the Senate.  They’re required to pass one, and they just haven’t done it.  It’s stunning that, in this day and age, when we have out of control government spending, that they would not even put down what their priorities are, and show where they—of course they want to keep spending, [but] they won’t even tell us where they want to keep doing the spending.  They just want to hide that from us.  It’s all politics.  They don’t want to go on the record for anything.  You can see that in the Senate, you can see that at the White House.  It’s becoming absurd.

I don’t hold out much hope.  The reason is that we have, supposedly, cut a trillion dollars out of the discretionary spending as part of the debt deal.  There’s certainly more discretionary spending to cut.  That’s just not where the money is anymore.  We have to reform entitlement programs.  That’s where the money is, and that’s what’s driving us into bankruptcy.  But the Democrats on that commission will never accept entitlement reform, because the President and all the Congressional candidates are going to run on preserving entitlements in their current form.  The President wants to run on a “Mediscare” campaign, as do Senators.  They want to basically say that—as you said earlier—Republicans want to throw Granny under the bus, or throw her off the cliff.  They’re not going to do anything that’s going to jeopardize their political campaign message, so I don’t hold that much hope that there can be real substantive change coming out of the commission.

…the President butchered this badly back in April with his big debt speech, where he obliterated his own budget and then submitted a speech in its place.  He called for fundamental tax reform.  At the same time, he said he wanted to eliminate the Bush tax cuts.  Well, you can’t have both.  They’re mutually exclusive.  Fundamental tax reform is—the purpose of that is to increase the tax base.  That means eliminating economically unjustified credits, deductions, and exemptions, and, in their place, lowering tax rates so that the new tax code doesn’t raise any more revenue than the old tax code, and that we have those lower rates in place to improve the incentives for working, saving, investing, taking on new risk—basically, the very basics of economic growth.  So the President confused that issue.  He made it, basically, impossible to move forward.

You start with Obamacare; you start with the financial overhaul regulation, the so-called Dodd-Frank bill; the threat of regulation from the EPA and other regulatory agencies; the constant threat of raising taxes; the demagoguing certain industries and certain individuals.  The President never stops demagoguing the rich, corporate jet owners, oil companies, the productive people in this society.  You add it all up, and I think we’re basically having what we had during the Great Depression, which is a capital strike.  People with the money to invest are saying, “We’re not going to invest as long this guy’s in office.  We could be the target of his next attack, and we’re just not going to put up with that.”

One thing that’s interesting, that often gets overlooked, is that one of the first acts of this administration was to basically destroy the legal precedent for what happens when a company goes into bankruptcy, with the Chrysler bankruptcy.  Basically, when companies go into bankruptcy it’s the bondholders who are first at the trough.  They get paid back first, and then there’s a legal list of who comes second, third and fourth.  Obama came in and said, “No, we’re not paying the bondholders, we’re going to give the money to the United Auto Workers.”  The bondholders said, “Whoa!  Hold on!  This is not—this is illegal!  You can’t do this!’  And he basically threatened them.  He basically told them to keep their mouths shut, or he would make it much worse for them than it already was.  That was very chilling to markets who base their activities on common law, on, basically, a stable legal structure.  Ever since then, I think, it’s had a chilling effect on the economy and on investment going forward, because no one knows what law the President will choose to ignore next.

There’s lots of things to do.  First of all, roll back all the big government programs that have passed in the last couple years, including Obamacare, including the financial reform regulation.  Cut spending anywhere and everywhere you can, entitlement reform programs, like the Heritage Foundation has laid out.  Reform the tax code by increasing the tax base, by getting rid of so-called loopholes, and lowering tax rates, and then just get government out of the way.  I think the slow growing economy is largely the result of no one wanting to invest in this current political climate, with so much uncertainty and the threat of being attacked from the White House at any given day because you happen to be productive and successful.

Back in 2007, before the recession, tax receipts were above the historical average, well above.  In the aftermath of the recession they’ve plummeted.  Once the economy starts growing again, receipts will rebound and will grow back to that historical average and above it.  So this has nothing to do with low tax rates.  It has everything to do with the economy, and the President should stop making the case that we need higher taxes to increase revenue. What we need is economic recovery.

Roger Aronoff is the Editor of Accuracy in Media, and is the writer/director of the award-winning documentary, “Confronting Iraq: Conflict and Hope.” He can be contacted at

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