Budget experts grade Obama

NEW YORK (CNNMoney) -- President Obama was under pressure on Tuesday night to not only deliver proposals for expanding the economy, but to show leadership in addressing the large, looming debt on the U.S. balance sheet.

Did he succeed? CNNMoney asked 5 leading fiscal experts to assess the president's promises and proposals on spending, taxes and debt.

Weighing in are David Stockman, former White House budget director under President Reagan; economists Dean Baker and Diane Rogers, tax expert Len Burman, and veteran budget expert Stan Collender.

All the wrong moves

David Stockman, former White House budget director under President Reagan

The president's speech was just dreadful -- a ponderous procession of pedantry and platitudes. He did not recommend a single hard choice or call for a scintilla of sacrifice. The nation is borderline bankrupt yet he now proposes to double-down on December's $800 billion tax giveaway with billions of so-called "investment" spending -- just another pot of pork on closer examination.

We are already spending $1 trillion on education. That is 7% of gross domestic product and is double the constant dollar level of 1990. Real spending per pupil is up 50% in that period, but test scores haven't improved. Instead of busting the budget, we need to bust the teachers unions and their predatory waste of existing funds.

Obama's call for more federal R&D funding is also off the mark. We already spend nearly $400 billion or 2.7% of GDP on research and development -- a higher share of national income than Germany, France, England and China. And green energy subsidies are just another opportunity for plunder by the K Street lobby brigade. Instead, put a big tax on oil imports if you want more domestic production and alternative energy investment.

We don't need another $50 billion in pork barrel transportation infrastructure and high speed rail projects, either. We are already spending $150 billion on transportation annually -- the highest level in history.

Finally, the proposed freeze on a tiny 12% corner of the budget and merely $15 billion per year in defense spending cuts is pitiful.

We need decisive leadership to: (a) drastically shrink our obsolete $800 billion defense and security establishment; (b) establish means testing of $1.2 trillion in Social Security and Medicare entitlements; and (c) enact major new sources of revenue -- such as a transaction tax on Wall Street. On these tough anti-deficit choices, the president was utterly silent.

Some positives for bond market

Stan Collender, veteran budget expert and founder of the blog "Capital Gains and Games"

President Obama's remarks with regard to spending, revenues and the deficit were limited and general.

Without the further information that won't be available until his budget is released in three weeks or so it's impossible to do much number crunching.

The president did either talk directly about or hint at a number of budget-related principles that may be the best indication of what lies ahead. For example, he indicated that his new initiatives would be paid for with spending cuts and revenue increases.

That's important because it seems to indicate that the White House will not propose legislative changes that will increase the deficit.

He also spoke about a five-year freeze in domestic appropriations that, if it were kept in place over the five years, would have a significant impact on the size of the deficit and the amount that the government would have to borrow. As a result, it should be a positive for the bond market.

The most interesting and far-reaching idea the president mentioned was simplifying both the corporate and individual income tax codes. This necessarily means that many of the exceptions, deductions and credits that encourage or favor certain activities and industries would be eliminated in favor of a broader base. That would make the economy more efficient in economic terms, but it would also come at the expense of higher taxes paid by some individuals and companies.

As we saw in 1986, when the last major "simplification" took place, this will be a very tough fight.

Bottom line: The president's proposals imply that deficit reduction for the next few years will be slightly above what would happen under baseline assumptions. That's won't be insignificant -- the deficit would likely fall to around $800 billion in 2012 and $600 billion in 2013 from $1.4 trillion in 2009 -- but it may not be the more rapid progress some would prefer.

Not courageous enough

Diane Rogers, chief economist of the Concord Coalition, a deficit watchdog group

For most of his State of the Union speech, President Obama made promises for additional federal spending and tax cuts, motivated by the ongoing needs of our still-struggling economy.

It was only toward the end of his speech that he reiterated his commitment to fiscal responsibility. He proposed a five-year freeze on non-security discretionary spending, which he says would save around $400 billion over the next ten years. But this amounts to a mere 6% reduction of projected deficits and a less than 1% reduction in total federal spending.

As the president's own fiscal commission made clear, any real solution will have to involve cuts to defense and national security spending as well, and reforms to the largest mandatory spending programs, Social Security and Medicare.

At the same time, recognizing that it will be nearly impossible (as well as undesirable) to cut benefits across the board in order to "flat line" entitlement spending, the president's commission recognized that additional tax revenue -- above the historical average and above current policy extended -- will be needed. Everything in the federal budget needs to be put on the deficit-reduction table.

While the president acknowledged his commission's message on the need for major reforms to these major programs, he avoided mentioning that these involve tough policy choices about whose benefits will be cut and whose taxes will be raised.

The president sounded committed on the general principle of fiscal responsibility but is still not courageous enough to spell out to the American people what exactly that will require.

If he does not take the lead on that difficult conversation, and instead continues the easier practice of promising and following through on more deficit spending, there is very little hope that we will see the kinds of policy changes that are needed to put our nation back on an economically sustainable path.

Kudos for protecting Social Security

Dean Baker, co-director of the liberal Center for Economic and Policy Research

President Obama resisted the immense pressure from the financial industry and other opponents of Social Security and Medicare by refusing to call for large cuts in these programs in his State of the Union Address. Given the power of these groups, this would have been the easiest path for him to take. However, he instead insisted on the need to protect Social Security and to ensure that future generations of workers can also depend on it.

In reference to Medicare and Medicaid, the president stuck to the facts and pointed out that the problem is the broken U.S. health care system, not inefficiencies in these programs. He noted the progress made in controlling health care costs in the Affordable Care Act, but acknowledged the need to go much further in containing costs.

The president laid out an ambitious investment agenda, although it is not clear whether Congress will be prepared to fund it. He noted the extent to which the United States is falling behind other countries in areas like clean energy and high-speed rail and also in educational attainment. It is difficult to envision major progress in these areas without very substantial spending.

While there are always opportunities to eliminate waste and improve funding priorities, it is not plausible that major new initiatives can be financed through these routes.

The most disappointing aspect of the speech is that it largely skipped over the current economic crisis. This may reflect a view that there is little that Congress will agree to do to at this point, but it still is unconscionable to accept the idea that 25 million workers will go unemployed or under-employed, with millions more losing their home, because of the economic mismanagement by the country's leaders.

Needs to lead on tax reform

Len Burman, co-founder of the Tax Policy Center and professor of public affairs at Syracuse University

I heard a lot of the themes I wanted to hear in the speech. It reminded me of Reagan's "Morning in America" speech -- talking about America's greatness and promise. I think that is the right approach to inspire the country to act.

However, the president didn't emphasize enough the risk from excessive debt. He called it unsustainable, which is true but also a cliché. Budget Committee Chairman Paul Ryan did a much better job of explaining the urgency of action on the debt in his reply.

Neither Obama nor Ryan offered much in specifics in their debt reduction plans. Ryan called for smaller government, but didn't say what he would cut. The president's major specific deficit reduction proposal is a five-year freeze in domestic discretionary spending. (He proposed a three-year freeze last year.)

A five-year freeze would save $400 billion over ten years -- chump change compared with $10 trillion in projected deficits. But Obama also acknowledged that non-defense discretionary spending is a fraction of overall spending and that cuts in defense, entitlements, and tax expenditures would be necessary.

In a major departure, the president targeted "spending through tax breaks and loopholes." This is important. Tax expenditures will cost over $1 trillion in 2011 -- more than domestic discretionary spending or defense -- and they are growing faster than the economy.

State of the Union Addresses are usually chock-full of new tax credit proposals, but the president only proposed to extend one existing tax credit for higher education, perhaps suggesting new fiscal restraint.

Most importantly, he acknowledged bipartisan interest in tax reform saying he was "prepared to join them." I think he'll need to lead, rather than follow, but I'm glad he's on board.

Let's hope he follows through. To top of page

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