Quick thoughts on the President's speech:
1. He has now added his voice to the larger fiscal consolidation discussion. That is a potentially welcome development, but the important thing will be whether agreement can be achieved that leads to credible fiscal consolidation. In other words, the results will be what matters.
2. The President's approach requires on spending cuts for 2/3 of the deficit reduction ($2T spending cuts) and 1/3 on taxes ($1T taxes). The additional $1T trillion in savings would materialize from reduced interest payments, which are a function of deficit savings (2/3 of which would come from spending reductions and 1/3 from taxes) and interest rates.
It should be noted that
CNN treated the interest savings as a spending cut, stating that 75% of the deficit reduction would be achieved from spending cuts. However, that is technically incorrect. Interest savings are not a spending cut. The government does not possess the freedom to cut its interest payments to whatever figure it wants outside of default. Instead, those savings can only be achieved by slower growth in the nation's debt than what is projected for the current fiscal path. That relatively slower growth in the nation's debt would be achieved by the mix of spending reductions and tax revenue increases. Hence, that same mix should properly be attributed to the interest savings.
3. Many critical details remain to be resolved. For example, the President noted that reduced growth in domestic discretionary spending would yield $750 billion in savings over the next 12 years. Aside from providing a few details as to what he did not plan to cut (investments in medical research, clean energy, new roads, new airports, broadband access, education, and job training), he did not spell out what programs would actually be reduced and by how much.
4. With respect to Defense Department savings, he stated that he would work with Secretary of Defense Gates and the Joint Chiefs on a review. Those details are subject to the review.
5. On health care spending, even as he had previously acknowledged that Medicare and Medicaid are key drivers of the nation's fiscal challenge, he relied on the political favorite of reducing waste and fraud ("wasteful subsidies and erroneous payments). He did mention that Medicare would negotiate prescription drug prices. He promised to work with governors "to demand more efficiency and accountability" from Medicaid. Even as he offered few details, he declared that an additional $500 billion in savings would be realized from Medicare and Medicaid. But without the specifics, it is difficult to determine how feasible that estimate is.
My concern with the concept is that it does not place enough emphasis on Medicare and Medicaid reforms. With details lacking, it is difficult to see whether the two programs that are major drivers of the nation's fiscal imbalances, would be fundamentally reformed. The implicit assumption might be that cosmetic changes would be more likely. If, in fact, that is the case, then progress along the President's path could be temporary. Ultimately, the largely unreformed Medicare and Medicaid imbalances would erode and then reverse the progress. For now, I'm hesitant to argue that there wouldn't be serious reform of those programs, but the speech (emphasis only on prescription drugs and mainly on waste/fraud/efficiency savings) appears to discount fundamental reforms.
6. No increase in the Social Security eligibility age, much less linking the age to life expectancy was offered. Yet, in macroeconomic terms, that would be relatively neutral, as it would have little impact on personal consumption expenditures.
7. The magnitude of savings is less than those proposed by Bowles-Simpson and Congressman Paul Ryan. In addition, the timeframe involved is somewhat lengthier.
8. He proposes a trigger ("debt failsafe") should the nation's debt as a share of GDP not stabilize and then decline as projected by 2014 or if Congress fails to act. However, without details, it is difficult to know how this process would work, whether there is assurance that it would work, and also its constitutionality.
