Following: a reproduction of a forum post I wrote a few days ago.
Matt Yglesias has a very important piece up today. Everyone should read it, and keep it in mind when you listen to the Obama and Romney campaigns talk about the deficit, as well as when you hear about people complimenting the Ryan plan, or Simpson-Bowles, or whatever.
I’ve often said – and this isn’t original analysis on my part – that we don’t have one budget deficit, we have several. They are:
- A short term budget deficit related to the Great Recession. When the economy is shit all sorts of automatic stabilizers (unemployment, AFDC, &c) kick in while tax revenue declines. As a result the deficit increases. You can also lump TARP and the various stimulus programs in here, but as they’ve mostly run their course at this point they’re not really a part of the deficit.
– A deficit created by Bush-era policies that created a revenue/expenditure imbalance: tax cuts, Medicare Part D, &c. You can lump the Iraq and Afghanistan wars in here as well; though the former is basically done with and the latter is winding down.
– A long-term deficit created by the retiring of the baby boomers causing a one-time increase in Social Security and Medicare outlays, as more beneficiaries are added to this program.
– A long-term deficit created by Medicare cost expansion as a function of overall healthcare cost growth in the US.
Discussions about the deficit tend to focus overwhelmingly on the final two, and almost totally ignore the first one. Democrats like to talk about the second, but Republicans refuse to acknowledge it exists The thing is, it’s the first two that Congress can reasonably deal with. Today Congress could improve our long-term fiscal picture by passing stimulative policies that increase the short-term deficit in the interests of boosting long-term growth. Congress could also work to address the imbalances created by the previous GOP administration and Congress.
What politicians really like to do is talk about the latter two. And they do it in a totally asinine way: rather than come up with actual ways of containing Medicare cost growth, they just tell CBO to make an assumption. Assume that Medicare costs grow at GDP + 0.5% for example. CBO has to do this because they have to do what they’re told, and as a result you get plans that seem to reduce the deficit.
Here’s the thing: Congress can make no law binding future Congresses. There is literally no possible way for the Congress of today to mandate what the level of Medicare spending will be in 2040. That’s up to the Congress and President in 2040. So even if Congress passes a law saying Thou Shalt Not Grow Medicare Faster Than GDP, short of an actual Constitutional amendment that law is totally, completely useless. Example: the Sustainable Growth Rate, passed by Congress in the nineties to limit the growth of Medicare reimbursement rates to providers. Pretty much ever since then, like clockwork, Congress passes an exemption to the SGR.
That’s not to say that you can’t do long-term deficit reduction today. It’s just that such reduction is really difficult and it’s politically poisonous. Take Social Security, for example: SS faces a medium-term increase in outlays as the baby boomers retire. There are various ways we could address this, suggestions range from raising payroll taxes (perhaps by removing tax cap on high incomes) to reducing benefits to raising the retirement age. The problem is that these are all changes that have various constituencies aligned against them, so they don’t happen. Notably what won’t work: passing a law declaring that SS outlays between now and 2040 will go up by only some percentage. That’s just a waste of time.
Medicare is an even more difficult problem, because its problems are linked to the problems of our health care industry, and you all remember what happened last time politicians tinkered with that system.
The reality of deficit reduction is that it’s going to be politically poisonous. Taxes are going to have to go up (and not just on the wealthy), and outlays will probably have to decline somewhat. From a political economy perspective the only way this is going to happen is if you get massive buy-in from both sides of the aisle; you need a situation where neither party can run against the other based on whatever policies end up being enacted. Politically Democrats seem to get this, it’s why you see them offering proposals that pair spending cuts with tax increases. Most of these policies are inadequate, but at least they’ve got their heads in the right place. Unfortunately Republicans are off in their fantasy land where tax cuts increase revenue and we can solve our budgetary problems by cutting funding for NPR. Until that changes, don’t expect any progress to be made on this issue.
Summary of my point for the tl;dr crowd who just scroll to the bottom of the post: When you’re evaluating any discussion about the deficit, you should pay attention to the specifics. Anything that boils down to a mandate on a price level or rate should be totally ignored. Once you’ve done that, see what’s actually left and then judge that on the merits.
PS: it occurred to me that we can kill two birds with one stone with an immigration reform plan that increased the number of foreigners we allow into the US. The third deficit I identified – the retirement of the baby boomers – is mostly a function of shifting age demographics. Put simply: relatively fewer young people paying for the retirement of relatively more old people. It turns out that the planet has a pretty huge supply of young people who would love to come and pay for our parents’ retirement, if only we’d let them.l
PPS: It turns out that the Center on Budget and Policy Priorities has updated its visual depiction of where our deficits come from. Find it here.