The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Whether the Joint Select Committee on Budget Reduction reaches a deal to reduce the federal deficit by at least $1.2 trillion or reaches a stalemate on Nov. 23, Democrats appear intent on handicapping the national economy with higher taxes and imperiling national security by cutting defense. Those are the wrong places to solve the nation's budget woes.
In 2007, just before the financial crisis and when Democrats took control of Congress, the deficit was a manageable $161 billion. Wars in Iraq and Afghanistan were ongoing, and Bush tax cuts and prescription benefits for seniors were in place.
In 2011, two years after the recession ended, the deficit is $1.3 trillion. Spending is up $847 billion, and additional temporary tax cuts -- such as the payroll tax holiday -- account for the rest. Of the $847 billion, only $62 billion was necessary to accommodate inflation, and Social Security, health care and other entitlements account for 78% of the rest.
Repeatedly, President Obama and Senate Majority Leader Harry Reid (D., Nev.) have said Social Security is not contributing to the deficit, but the program began paying out more than its receipts in 2009, and the Trust Fund will be entirely depleted by 2036.
Federal and state budgets are burdened by the least effective health care and education systems among industrialized countries. For example, the German and Dutch private systems spend about 50% less per capita but have better outcomes.
Progressive education advocates equate reform with more money, even though the U.S. has one of the most expensive systems on the planet and gets subpar results. Test scores are lower, and graduates lack job skills employers seek to build globally competitive enterprises.
Raising taxes to accommodate, instead of fixing, those shortcomings would permanently burden the U.S. private sector with more overhead -- higher taxes, health care premiums and tuition -- than foreign economies bear, making economic recovery and adequate jobs creation next to impossible.
Real reform requires spending less, not more, by ferreting out waste foreign health and education systems do not impose on taxpayers and businesses.
Yet, the Budget Control Act requires that if the Special Joint Committee can't reach a deal -- and Democrats remain steadfast they will block any deal that cuts federal health care spending or does not raise taxes -- then sequestration imposes $1.2 trillion in cuts on other discretionary programs and defense.
Budget calculations imposed on the Special Joint Committee already score savings from ending wars in Iraq and Afghanistan; hence sequestration requires the base defense budget (defense spending less costs of troop deployment) contribute 42% percent of the $1.2 trillion, and that is not practical.
U.S. military hardware is aging and becoming less effective. Sons are manning fighters flown by fathers, and the typical Air Force bomber is 34 years old.
The number of Air force fighters has decreased from 3,602 in 2000 to 1,990 in 2011 and will fall to 1,739 at current funding levels. Similarly, the number of navy ships is down from 316 to 288, and will fall to 263. Sequestration would reduce those numbers much further.
Cyberwarfare and China, which is building a navy to challenge the U.S. in the Pacific, do not shift U.S. security challenges from one venue to another but rather add to the challenges.
Specifically, U.S. and allied dependence on Middle East oil will continue for another generation -- even with the best efforts to develop alternative energy resources -- and U.S. naval assets cannot be shifted from the Persian Gulf to counter China's buildup in the Pacific. Economic and political upheavals in Europe and North Africa make the U.S. naval presence in the Mediterranean and North Atlantic even more vital.
Current Chinese military spending is only about 17% of U.S. base budget outlays, but China's currency is widely acknowledged to be undervalued. Applying IMF Purchasing Power Parity exchange rates, Chinese spending is 27% of the U.S. base budget. Based on recent growth, China's military spending would be 66% of U.S. levels in 2021 without sequestration, and 60% with sequestration.
China does not have troops, aircraft and naval assets tied up around the world with established commitments, and with defense spending at 60% of U.S. levels, it will seriously challenge the U.S. guarantee of security to Taiwan, Japan and even Australia.
To get the economy going and meet U.S. security commitments, the budget deficit must be tackled, but that begins with finally recognizing Social Security, health care and education must be reformed to absorb fewer, not more, national resources.
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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.