Correspondence

by | June 7, 2004

UNCALCULATED

In his book review, Robert J. Samuelson argues that the nation's central budgetary problem is "federal spending, driven by higher retirement benefits for aging baby-boomers" ("What the Boom Forgot," May 3). Samuelson criticizes the Clinton administration for failing to address that problem by scaling back Social Security and Medicare. The projected imbalances in government retirement programs are indeed worrisome, and it is unfortunate that progress was not made in addressing them during the 1990s. But Samuelson does not adequately explain that the critical long-term expenditure problem lies in Medicare and Medicaid-- far more so than in Social Security--and he overlooks the role of recent tax cuts in worsening the budget outlook.

Over the next 75 years, the cost of Medicare and Medicaid will rise by more than 10 percent of gross domestic product (GDP), due to an aging population and increases in health care costs. That is more than four times the expected increase in Social Security costs over the same period. The distinction matters because rising Medicare and Medicaid costs are harder to address. Some changes can certainly be instituted in Medicare, such as increased premiums. But the most critical task is to slow the rate of growth in health care costs system- wide--a tough proposition. Otherwise, it won't be possible to achieve significant savings in Medicare and Medicaid without substantially increasing the number of Americans who are uninsured or underinsured. Samuelson chides the Clinton administration for failing to tackle these big issues, but that administration at least addressed--albeit unsuccessfully--systemic health care reform.

Samuelson's analysis of long-term fiscal problems also leaves out the 2001 and 2003 tax cuts. If made permanent, these tax cuts will cost more than $10 trillion over the next 75 years--three times the entire Social Security shortfall over this period. One cannot bemoan Social Security's contribution to budget problems while barely mentioning the tax cuts. Unless one believes that long-term deficits can be closed entirely on the expenditure side--undesirable substantively and implausible politically--future generations would have faced heavier tax burdens than current generations, even before the recent tax cuts. Why impose larger fiscal burdens on future generations to finance tax cuts for current ones? Samuelson also gives short shrift to the "save Social Security first" strategy that the Clinton administration pursued in the late '90s. A key goal of that strategy was to use budget surpluses to pay off the national debt. Far from shifting costs to future generations, as Samuelson charges, this policy sought to do the reverse--to reduce the debt burden we impose on future generations of taxpayers.

Another weakness of the review is that Samuelson appears of two minds on the dangers of deficits. In belittling the Clinton administration's deficit- reduction efforts, he argues that deficits "do not matter nearly as much as the public and many economists believe" and dismisses the reduction in the deficit by 2.5 percent of GDP between 1992 and 1995 as "such a small change." But, in arguing for significant cuts in retirement programs, he warns that "there could easily be circumstances" in which large, persistent deficits could "trigger a financial crisis" and "reduce economic growth." This inconsistency is reflected in his advocacy of Social Security benefit reductions to curb rising costs. The total increase in Social Security expenditures over the next 75 years will amount to 2.5 percent of GDP, the same amount he dismisses elsewhere as a small change.

Deficits do, in fact, matter. When the deficit fell by 2.5 percent of GDP between 1992 and 1995, the share of net private savings soaked up by the deficit fell by a full third, freeing more funds for investment. And, contrary to Samuelson's claim that deficits aren't that important because we can borrow from foreigners, such borrowing has real costs. The more than $2 trillion in debt to foreigners we have now accumulated effectively mortgages our domestic investments, since foreign creditors will capture a share of the returns on those investments. Samuelson also downplays the deficit-reduction efforts of the '90s by claiming that "good luck, more than good policy, produced the surpluses." Good policy in 1990 and 1993 got us from large, growing, and potentially dangerous deficits to smaller, stable, manageable deficits. Good luck--revenue growth associated with the late '90s boom and the post-cold-war reduction in military spending--then turned those small deficits into surpluses. It's true that good policy alone did not produce the surpluses. It is equally true that the surpluses would not have materialized without sound policy.

Today, after three years of large tax cuts and other adverse fiscal developments, the fiscal picture has darkened considerably. The fiscal policies of the '90s that Samuelson dismisses look better in hindsight, not worse.

J. Bradford Delong

Robert Greenstein

Peter R. Orszag

The authors are, respectively, professor of economics at the University of California at Berkeley, executive director of the Center on Budget and Policy Priorities, and senior fellow in economic studies at the Brookings Institution.

 

UPSET

Last month, I saw the Thunder Nationals Final Round in New Hampshire ("Sunday!" April 12 %amp% 19). Contrary to Clay Risen's assertion, Monster Truck races are not staged--Grave Digger lost to Bad News before a dumbfounded audience (seen nursing the hurt). Much to the chagrin of those little boys sporting green and black t-shirts and waving the pirate flag, no one was prepared for Grave Digger's demise. Grave Digger heard his dirge, and Bad News was there to sing it.

Rob Colvin

Durham, New Hampshire

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