Can We Afford All This?

By John F. Dickerson

When Congress voted to cover prescription-drug costs for Medicare beneficiaries, President Bush got a chance to boast of his Trumanesque buck-stopping as the nation's top executive. "We have a responsibility in Washington to solve problems and not pass them on," he said. As the largest expansion of the program since its inception in 1965, the $400 billion plan was a big solution indeed. But for a band of deficit hawks and rainy-day worriers in Washington, it was a horror--the latest evidence that in the past five years they have become voices in the wilderness. How to keep the federal budget in check--an issue that was once central to both Democratic and Republican politics--has been shunted aside, leaving fiscal conservatives at think tanks across the country fretting over how to make their case as the deficit grows to $500 billion and those in charge seem inclined only to add to it. "There's going to have to be a crisis to get people to pay attention," says one of the leading members of the tribe. "And there's going to have to be another Ross Perot."

Where are you, Ross Perot? The Texas millionaire who won 19% of the vote in 1992 after teaching the country to get angry about the budget deficit should be banging his spoon on the table right now. Or a draft-Perot movement should be under way. (Perot declined to talk to TIME.) In addition to the new burden for Medicare, discretionary spending has increased 27% in the past two years. Much of that has gone to fighting the war on terrorism, but funds have also been spent on new benefits for veterans, subsidies for farmers and aid to low-performing schools and needy students. Pork-barrel spending is also on the rise. In the past two years, it has gone up 48%, according to one watchdog group, including millions of dollars in the farm bill that went to those infamous mohair subsidies, and politicians of both parties are quietly delighted that the public no longer seems to care. But economists are concerned that with each new trip to the trough, lawmakers are accelerating the arrival of a fiscal disaster. "The U.S. budget is out of control," the Wall Street investment firm Goldman Sachs & Co. warned in a newsletter to clients late last month.

In the race to provide 40 million seniors with the popular drug benefit, the voices of fiscal restraint were quashed--a last-minute attempt to stall the bill on the ground that it busted the budget was voted down--and any serious attempts to contain costs were lost in the bargaining to win votes. That means the $400 billion program is likely to cost a good deal more than was advertised in the brochure. For one thing, estimates for entitlement programs are notoriously low. In 1966, according to Douglas Bandow, a senior fellow at the libertarian Cato Institute, Medicare was predicted to cost $12 billion by 1990--a guess that fell short by $95 billion. In the case of the new benefit, many believe the cost could balloon because there are few mechanisms to keep drug prices low. Republican leaders insisted that the Federal Government should not use its bulk-purchasing power to demand low prices. Instead, the program will rely on pharmacy benefit managers to negotiate good deals; the companies will have more bargaining clout than senior citizens but far less than the Federal Government would have had. At the same time, provisions to ease restrictions on cheaper drugs from Canada and elsewhere were removed from the legislation.

For this and other reasons, the announced price tag hides the magnitude of the promises being put into law. Douglas Holtz-Eakin, director of the Congressional Budget Office, says the costs of the bill will jump in the second decade to between $1.3 trillion and $2 trillion. A gap in coverage means those with prescription bills between $2,250 and $5,100 get no relief. It's a good bet that politically powerful seniors aren't likely to allow that hole to gape for long; expect to see politicians buckle as they have before when faced with the well-organized lobby. That would mean billions in new spending. "This is an unbelievable expansion in spending generally, and particularly in an entitlement program, which is notoriously hard to control," says Stuart Butler of the conservative Heritage Foundation.

Before the current Medicare changes, the system was scheduled to run dry in 2026, when the 77 million baby boomers enjoying long life spans will make more demands on the system than it can handle. Now the bills for their drugs--yet-to-be-discovered superdrugs in particular--may accelerate that crisis. Senior Administration officials admit this round of reform ducks the hard calls that need to be made today to address the system's demographic crisis. A fix is going to require some combination of reduced benefits, tax increases and change in the retirement age. Choosing among those options will spark much more passionate conflict than the most recent bill. But now that the country has endured a Medicare debate, it is unlikely that voters are game for a bigger, tougher one, especially since Congress has given away a drug benefit without asking for much sacrifice in return. "To get the country to do what needs to be done to fix the system you need to have some kind of sweetener," says Maya MacGuineas, executive director of the Committee for a Responsible Federal Budget. "They've just given away the only sweetener."

And what about that 27% increase in discretionary spending in the past two years? Not all of it has gone to support the wars in Afghanistan and Iraq, although it was the $87 billion additional cost of those ventures that gave voters momentary sticker shock earlier this year. In May 2002, a $183 billion farm bill propped up corn and peanut growers whom Congress had once promised to wean off the federal dollar. This year veterans' benefits were upped by $22 billion, and $50 billion was added in Medicare fees for doctors. What made much of this possible is that the budget edict requiring all new tax cuts or spending increases to be offset by equivalent tax increases or benefit reductions was allowed to lapse last year.

Pork, never out of fashion, is back in double measure. Besides those mohair subsidies, money is being spent to study exotic pet diseases in California, and, says Republican Senator John McCain, who has made a career of railing against such expenditures, "$1 million will go for grasshopper and Mormon cricket activities in Utah." And there is more being brought to the checkout counter. A major energy bill has yet to pass, but to get over each hurdle, new money was added to buy votes. The bill being debated is now at $31 billion, three times the size the President requested. And this month Congress is scheduled to take up another pork magnet, the lumbering $328 billion appropriations bill that combines seven different funding measures to finance 11 of the 15 Cabinet departments and several agencies.

President Bush has already passed tax cuts that will cost $1.7 trillion over 10 years, and that means there's less money coming into federal coffers in the short term. That has contributed to a debt that this year reached $6.9 trillion. And more tax cuts may be on the way. In coming years, tax breaks for married couples and children that are on track to disappear are almost certain to be sustained, and some kind of costly fix is likely for the alternative minimum tax, which is hitting a disproportionate share of the middle class. While many number crunchers understand that war and a soft economy make deficits a necessity, they worry that the spending frenzy will not end once those extraordinary conditions abate. Not only are items being locked into the budget that will be hard to cut later, but beating back check-writing fever also takes time, which means an inevitable delay in focusing on the deteriorating fiscal condition of entitlements like Medicare and Social Security. Traditional dangers associated with high deficits have yet to appear--interest rates are still near record lows--but analysts are worried that the situation will change and that they will see a depressed currency and billions tied up in government debt instead of being available for more productive purposes in the free market. "Deficits are like termites," says Alan Blinder, an economics professor at Princeton who served on the Federal Reserve Board under Bill Clinton. "Nobody sees them doing their dirty work, but over time they're corrosive."

The White House gets much of the blame from fiscal conservatives for allowing Congress to break the bank. "George Bush doesn't really have an anti-Big Government bone in his body," says Stephen Moore, president of the Club for Growth, a group that promotes limited government. "Compassionate conservatism means never having to say no."

Bush officials argue that most spending increases were necessary to fight terrorism and that smaller tax receipts resulting from the economic downturn played a bigger role than Bush's tax cuts in the deficit increase. The President has now promised to cut the deficit in half over the next five years. To achieve this ambitious goal, he wants to limit discretionary growth to 4% next year. But his budgeters are likely to make that number by not counting emergency, defense and homeland-security costs. Above all, the Bush team is counting on growing out of the deficit. If economic activity is robust, the thinking goes, revenues from taxes will increase despite lower rates. Thus far, the economy is doing its part to make that happen, churning in the third quarter at a scorching 8.2% pace. Job production appears to be inching back, and consumer confidence is at its highest level in more than a year. Deficits are bad, White House aides concede, but slavish concern about them--which they associate with Clinton Treasury Secretary Robert Rubin--would have kept them from passing the tax cuts they argue are fueling the current boom. "All the fears of Rubinomics have not come to pass," says a senior White House official.

The Democrats, meanwhile, are not helping deficit hawks make their case, having shown few signs of running on fiscal restraint themselves. In fact, last week one presidential contender, Senator John Kerry of Massachusetts, tried repeatedly to paint the field's putative front runner, former Vermont Governor Howard Dean, as a "balanced-budget freak" and to nail him for once wanting to "slow the rate of growth" of Medicare. Dean bobbed and weaved, proving that he too knows there is no political appetite for a candidate who serves up hard choices. The polls don't seem to give him or his competitors much incentive to do otherwise: fully 72% of Democratic voters say the country should go into debt to spend more on social programs, according to the Pew Research Center, a 20-point increase since 1997, when budget balancing was in high fashion.

Bush's tax cuts have been such nectar to conservatives that there's little danger of a broad fiscal revolt from his base. Furthermore, embracing the prescription-drug entitlement helps build the kind of governing majority that Bush's political brain Karl Rove has long dreamed of. When they were a minority party, Republicans could preach fiscal discipline. Now that they control Congress, the White House and more than half of the state houses, they have to show that they are listening--specifically on issues like health care and education, which were once considered territory only Democrats cared about. So if a little money needs to be spent along the way to buy votes and expand their base, the White House seems happy to open the store. --With reporting by Eric Roston and Douglas Waller/Washington

With reporting by Eric Roston and Douglas Waller/Washington