DEFICIT DEBATE FEBRUARY 12, 2013
Spoiler alert: Tonight President Barack Obama will call for a "balanced" approach to deficit reduction. Republicans, their allies, and quite a few pundits will respond by saying the real problem is government spending—and that the president is ignoring it. It's what they always say. And if you don't believe me, go online and watch some recent clips from MSNBC's "Morning Joe." Joe Scarborough, the normally affable (and Republican) co-host, has been practically apoplectic about this for the last few weeks, criticizing—among others—New York Times columnist Paul Krugman, House Minority Leader Nancy Pelosi, and of course Obama himself. All of them, he says, are ignorant or pretending to be so.
Thing is, Scarborough and his ilk have a point—not about the supposed ignorance of the Obama camp, but about the deficit. We do have a spending problem. It's just not the problem that these critics seem to think. It's a very specific spending problem, one that calls for a very specific kind of solution.
To understand why, you need an up-to-date picture of the economy and federal budget—which, conveniently enough, the Congressional Budget Office produced just last week. The short-term outlook on the deficit is pretty good, all things considered: It's down below $1 trillion for the first time since Obama took office, and is expected to continue going down for the next few years. The short-term outlook on the economy is pretty mediocre: The economy should keep growing, the CBO predicts, but not very quickly. These two facts are very much related: Given the weakness of the economy, deficits for the immediate future should ideally be higher, not lower.
The fiscal problem, as the CBO explains, is what happens after the next few years. Over time, the gap between what government spends on programs and interest, on the one hand, and what government raises in revenue, on the other hand, will likely grow. The bigger it gets, the more it threatens harm. Every dollar spent on interest, after all, is a dollar spent to a bondholder rather than a dollar spent on roads, tanks, schools, and assistance. Eventually we'll have to cut back what we spend or raise taxes a whole lot more—unless we're willing to borrow much more, thereby incurring bigger interest costs and, potentially, undermining economic growth.
One way to address this problem is to start raising taxes right now. The deal Obama and Republicans made in early January, restoring rates on high incomes to their Clinton-era levels, are a good start—but only a start. That deal produced only half the revenue that Obama sought when negotiations began. And, by historical and especially by international standards, Americans still don't pay very much in taxes. Eventually taxes should rise even on the middle class, not just the poor; Obama's 2008 vow not to raise taxes on incomes below $250,000 remains one of the worst, most damaging promises he's made. But there's no point in talking about higher taxes on the middle class when the wealthiest Americans are still benefiting from so many tax breaks.
So what about spending? Well, it's also a big problem, just as the conservatives and pundits say. But it's almost exclusively a health care problem. It's widely known now that the primary reason the CBO and most forecasters project large deficits in the future is that they expect the cost of Medicare and Medicaid to rise much faster than either revenues or economic growth. The projections suggest Social Security will also contribute to the deficit, but only incrementally and in ways that can be remedied with relatively small changes to the program. Spending on everything else is actually coming down. And while there's a solid case for spending less on defense, there's no reason whatsoever to spend less on non-defense "discretionary spending," which is basically everything else the government does and is already at historic lows. Further cuts to discretionary spending mean cuts to programs that actually foster future growth, like infrastructure and education, or cuts to programs that protect public safety, like the F.B.I. and Department of Agriculture. Or maybe you don't mind the occasional salmonella poisoning.
The question is what to do about health care spending. And the new wrinkle in that debate—a point the CBO also made—is that the problem seems to be getting a little better. Health care costs are still rising, but they're not rising as fast as they were before. One reason: The health care system seems to be becoming more efficient, partly in response to incentives from the Affordable Care Act. "The more we look at the data, the more it seems to me that the cost curve did bend before the recession," Charles Roehrig, an analyst at the Altarum Institute, told The New York Times.1
How significant are these changes? How long will they last? Nobody knows. Honest, serious people can disagree about how policymakers should react. I happen to believe we should wait to see which of Obamacare's cost control efforts work best. But here's where the folks who say Obama ignores spending are clearly, egregiously wrong: He hasn't ignored health care spending and he hasn't ignored spending in general. The Affordable Care Act reduced Medicare spending by more than $700 billion over ten years (perhaps you saw the ads last campaign cycle?) and will reduce Medicare spending by even more in the decade that follows. Obama has since proposed further reductions in health care spending, not just on Medicare but also on Medicaid, and that's alongside other cuts in spending he's signed or agreed to support. As the Washington Post's Greg Sargent pointed out recently, even if Obama gets his way in the next big fiscal debate—over how to replace the automatic cuts of the sequester—the overall balance would still be "heavily lopsided" toward spending cuts. The real policy danger right now isn't the ignorance of government spending. It's the obsession with it.