The effort to cut federal budget deficits resembles nothing so much as the old movie serials in which each week the hero ran a gantlet of perils the last of which threatened imminent death or dismemberment. Seven days later, the intrepid adventurer would somehow escape unscathed, only to repeat the cycle.
The courageous crusader of the last couple of months has been the so-called ‘super committee,’ the group created by Congress last August to slay the economic menace threatening the economy—budget deficits. Impelling projected deficits are anticipated increases in the rising cost of health care for the elderly, disabled, and poor through Medicare and Medicaid.
Much of the press seems to regard the success or failure of the super Committee—and the Congressional action that will or will not follow when it agrees or fails to agree on a deficit reduction plan—as ‘the moment of truth,’ the testing time when the leaders of the United States will determine whether it remains a great economic power or falls prey to economic indiscipline. The test of seriousness, some argue, is the willingness to face up to the ‘unsustainability’ of Medicare and Medicaid in their current forms.
Nonsense! The debate on when and how to lower projected federal deficits is genuinely important. So are efforts to rein in growth of health care spending. The idea that this is the moment when future deficits will, can, or, indeed, should be closed is a delusion. So is the idea that growth of public health care spending can be slowed materially without reform of the whole health care system. But there is one genuinely serious matter at stake in the current deficit discussions. That crucial issue is whether any fiscal reform program Congress adopts uses tax increases to achieve at least half of the program’s deficit reduction. Without such tax increases, Medicare, Medicaid, and the subsidies of the Affordable Care Act—indeed, the whole social safety net—cannot long survive.
Deficit Cuts Should Begin Only After Economic Growth Recovers
First, cutting deficits at some point is vital. Debt cannot indefinitely grow faster than the nation’s economy without catastrophic consequences. But it would be genuinely stupid to cut spending or raise taxes significantly before the economy is advancing robustly and unemployment has been significantly reduced. When nearly 14 million people are unemployed—almost 6 million for more than six months—and an additional 8 million people have withdrawn from the labor force because job prospects are so poor, it is downright perverse to be talking primarily of cutting government spending—which will surely lower demand and put more people out of work—rather than about spending increases and tax cuts that will spur demand and put people to work.
Deficit Cuts Of $1.2 Trillion Would Only Make A Small Dent In The Long-Term Debt Problem
Second, there is little chance that Congress can agree now on measures sufficient to solve the long-term deficit challenge facing the nation; and there is absolutely no chance that the super committee can end the debate.
The committee’s minimum assignment—to cut deficits by $1.2 trillion over the next decade—is clear. If legislation is not enacted to lower federal budget deficits by at least $1.2 trillion over the next decade, spending will be cut automatically by enough to reach that target. If triggered, the automatic cuts will come half from national defense and half from domestic programs other than Social Security, Medicaid, and other programs for the poor. The automatic cuts to Medicare would come only from payments only to providers and could not exceed 2 percent—roughly $11 billion in 2013.
Current reports suggest that the committee will fail to meet this minimum target. Whether it will deadlock completely or agree on smaller cuts remains unclear. But even if it fulfilled its basic assignment, the deficit reduction job would remain mostly undone.
If current projections are correct, national debt in ten years will be 90 percent of national income and rising. That is the projection that is triggering so much angst today Suppose the automatic cuts of $1.2 trillion over ten years take effect when scheduled in 2013. Even with those cuts, current information indicates that projections in 2013 will anticipate national debt equal to 90 percent of national income ten years later. In other words, cutting the deficit by $1.2 trillion over the next decade will delay for just two years the return of fiscal conditions the same as those that are now causing so much concern. There is nothing magical about 90 percent, of course. Countries can get in trouble with creditors when debt is smaller. They may retain lenders’ confidence when debt is much larger.
Future deficits are projected to grow mostly because anticipated increases in health care spending—even with the deficit-reducing effects of the Affordable Care Act—are so large. It will take spending cuts or tax increases sufficient to cut deficits $4-5 trillion, not just $1.2 trillion, to prevent growth of national debt from greatly outpacing national income.
Debate Over Deficits Will Continue Regardless Of The Super Committee’s Results
The deficit reduction debate will not end, whatever the super committee may or may not recommend and however Congress responds to those recommendations. If the sequester is triggered, it now appears that there will be a strong move to suspend it. As it will not take effect until 2013, Congress will have plenty of time to undo it.
Within the next few weeks, Congress will once again have to decide whether to permit scheduled fee cuts for physicians under Medicare—now set to be about 27 percent—to take effect at the start of next year. That will be an occasion for yet more debate on how to revamp the Medicare payment system.
More generally, a 2013 effective date for spending cuts means that Congress may revisit any budget changes Congress may enact in response to recommendations of the Super Committee. One chance will come late in 2012 or early in 2013 when government debt exceeds the ceiling enacted last August. During the last negotiation over the debt ceiling, Republicans successfully used the threat of default to extract major budget concessions from the administration. One can have little doubt that they will use it again, reopening any fiscal issues not previously resolved to their liking.
The 2012 elections may well shift the balance of political power. Under some scenarios, the changes could be vast. If Republicans win the Senate (probable) and the presidency (possible), legislation could be enacted to replace Medicare with vouchers, to convert Medicaid to a block grant, and to repeal or substantially amend the Affordable Care Act. If president Obama is reelected and Democrats retain control of the Senate, it is possible that efforts would be made to roll back any spending cuts that cut seriously into safety-net programs. Either way, no decision on spending that isn’t implemented until 2013 can be regarded as final.
Failure To Include Tax Increases As Well As Spending Cuts Would Doom The Social Safety Net
As stated above, there is, however, one core principle at stake in the current debate. Given the size of the deficit cutting measures that will be required to prevent a debt explosion, simple arithmetic imposes a hard dilemma. Unless half or more of future deficit reduction comes from tax increases, the spending cuts required to stabilize the ratio of debt to national income will eventually be so large that it will be impossible to sustain Social Security, Medicare, Medicaid, and the premium subsidies of the Affordable Care Act. In the debate on raising the debt ceiling, Democrats agreed to a deficit-reduction program consisting exclusively of spending cuts. If that approach becomes entrenched, preserving major social insurance and social welfare legislation of the 20th century will become mathematically impossible.
In plain language, the most important issue for health care policy is not whether one or another of the various changes listed in the Budget Options book of the Congressional Budget office is enacted. It is whether Congress recognizes that tax increases must be a major part of any deficit reduction program. From the standpoint of preserving the social safety net, it would be better if the super committee deadlocked than if it reported a deficit reduction program relying exclusively or principally on spending cuts.