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Follow money to find the cuts

– Anyone with a heartbeat knows that there is some sort of unique financial rock formation posing a threat to the U.S. economy at year-end; that if President Obama and Congress don’t find a way around it – something at which Washington excels – bad things will happen to all of us.

Pardon my verbal gymnastics, but I’m trying to avoid typing “fiscal cliff” even as our government barrels toward it. In case you were under the impression there was a sense of urgency about preventing $500 billion of automatic tax increases and spending cuts from taking effect in the new year, think again. Obama scheduled no meetings with congressional budget negotiators last week. As soon as lawmakers returned to Washington, Obama decided to take his case to the people or, alternatively, bring the people to him to plead his case.

Ever since the Nov. 6 election, both parties have been focusing on a single issue: whether the Bush-era tax cuts for individuals making more than $200,000 a year ($250,000 for households) will be allowed to expire. Obama has threatened to veto any legislation that extends the cuts on the top 2 percent “because it’s bad economic policy,” according to White House spokesman Jay Carney.

The expiration of tax cuts on top earners would increase federal revenue by $824 billion during the next 10 years, according to Congressional Budget Office estimates. If Congress does nothing – if taxes go up across the board, discretionary spending is cut and Medicare payments to doctors are slashed, among other automatic adjustments – the Treasury would take in an additional $5.1 trillion of revenue over 10 years.

That’s hardly chump change, but even “big tax increases can’t cover the rising cost of entitlements,” said Joe Carson, director of global economic research at AllianceBernstein in New York.

Mandatory spending on programs such as Medicare, Medicaid and Social Security totaled $2.05 trillion in fiscal 2012, or 58 percent of the federal budget. Based on demographic trends, entitlement spending will reach $3.55 trillion in 2022, consuming almost two-thirds of the entire budget. In the past, the United States generated enough revenue to cover future costs. During the 1980s and 1990s, for example, the ratio of current revenue to entitlement spending five years out was 1.4, according to Carson.

Then the cost curve started bending in the wrong direction. The ratio of revenue to future entitlement costs fluctuated between 1 and 1.1 over the past decade: Tax revenue barely covered the part of the budget that is on automatic pilot. Even with a revenue boost from inaction on the fiscal cliff, the ratio of current revenue to projected entitlement spending never exceeds 1.15 during the rest of the decade, Carson says.

“The future cost of mandatory programs absorbs all of the projected growth in revenue from tax increases and economic expansion over the next decade,” he said.

In other words, without reforming entitlements, there will be no money for defense, education and other discretionary programs. That may be fine with Grover Norquist, he of the no-tax pledge, but it isn’t practical.

Neither is the notion that the nation’s fiscal problems can be fixed by raising revenue, eliminating waste, fraud and abuse (peanuts in the grand scheme) or tinkering with discretionary spending. Congress should heed the advice of Willie Sutton. According to lore, when Sutton was asked why he robbed banks, he replied: “That’s where the money is.” (Sutton denied ever saying that.)

If Congress wants to reduce the deficit, stabilize the debt, put spending and revenue on a sustainable path, or all of the above, it has to go where the money is. And the money, or the growth in spending, is in entitlements. Obama has said he is open to reforming the programs for the sick and elderly. Not that he has put anything on the table just yet.

And some members of his party blanch at the idea of cutting even a dime in benefits.

Still, many sensible ideas for reforming entitlements have been floated over time, including gradually raising the eligibility age for Social Security and Medicare; using prices, not wages, to compute a worker’s initial Social Security benefit; indexing federal programs to a chained inflation measure that more accurately reflects changes in spending patterns than the consumer price index; and subjecting programs to means testing. None of these long-term options even mentions the word “voucher.”

No one expects a short-term fix to avoid the fiscal cliff to include any long-term restructuring of entitlements. My concern is that whatever Obama and Congress come up with next year won’t rein in these popular programs. Without that, it isn’t a serious solution.

The “conciliatory” approach adopted by both parties this time, compared with the July 2011 negotiations over the debt ceiling, hasn’t convinced the public. About half (51 percent) of those surveyed said the president and Republicans won’t reach an agreement by Dec. 31, according to a Nov. 13 Pew Research Center poll. Only 38 percent expect the parties to strike a deal by year-end.

That doesn’t surprise me. I mean, how long can you listen to the same old talk before you start to wonder about the prospect for any real action?

Caroline Baum is a Bloomberg News columnist.

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