Why Deficit Reduction Is Necessary and Need Not Hurt the Poor

Isabel V. Sawhill

We need to reduce our long-term deficits. We cannot forever spend more than we collect in taxes. And if we continue on our current path we risk another economic crisis that is likely to produce even more unemployment than we have now.

To be sure, we should not cut the deficit right now—that would be very bad for the economy. We should combine stimulus now with legislative initiatives that gradually rein in spending and raise taxes once the economy has recovered.

But if we continue to ignore the huge accumulation of debt in our future, or assume it can be addressed without cutting domestic spending, it is the least advantaged who are likely to suffer the most.

Why do I say this?

First, if we have another economic crisis that produces high rates of unemployment for an extended period, social programs will do no more than temporarily reduce the harm inflicted on the least advantaged. The safety net is no substitute for a job and a growing economy. Deficits matter because, in the longer term, they undermine the economy’s ability to produce the jobs that are especially critical to moving people out of poverty and into the middle class.

Second, many progressives believe that we can solve our fiscal problems by cutting defense and raising taxes. Although I believe they are right to fight for both of these solutions, I do not think they will be sufficient. As I have argued in more detail elsewhere (see my debate with Greg Anrig in the September issue of Democracy: A Journal of Ideas), the numbers simply don’t add up unless taxes are raised across the board to unprecedented levels—and not just for the wealthy. This level of taxation is not only politically unfeasible but unfair to the many middle and working class families who are currently struggling and whose incomes were stagnating even before the recent downturn.

Third, any effort to protect Social Security and Medicare from future spending reductions – as many advocates are now arguing – will simply put more pressure on programs that serve the disadvantaged and their children. The rapid growth of spending on entitlements has already forced the Obama Administration to propose a freeze in non-security domestic spending.

In California, Governor Schwarzenegger has proposed an elimination of the state’s welfare-to-work program as well as most child care assistance for low-income families, a harbinger of what may happen at the national level as the budget squeeze plays out over the next decade or two. This should give pause to those who argue that we can’t touch health or retirement benefits for those over about age 55, since they won’t have time to adjust to the changes. There’s no such “adjustment time” permitted for single moms with a low-wage job who are suddenly forced to spend one third of their income on child care.

Those who care about protecting the less advantaged need to be willing to find savings in the largest and fastest growing portion of the federal budget—the big three entitlement programs: Social Security, Medicare, and Medicaid. In 2010, 71 percent of all revenues are devoted to just these three programs.

What kinds of changes should advocates for the poor support?

First, they should support reforms that leave the core commitments behind Social Security and Medicare intact and ensure that no one is left bereft of access to basic health care and a decent income in old age.

Second, they should support reforms that gradually trim benefits for the more affluent over time while protecting those at the bottom.

Third, they should support reforms that recognize that not all spending on health care improves health. Specifically, we need to move toward reimbursement rates for providers that are tied to evidence of effectiveness. The goal should be to improve health, not just access to health care. Thanks to the recent health care bill, health care itself is now nearly universal. But some estimates suggest that as much as a third of all health care spending does not improve health—an estimate that is further reinforced by the good health outcomes achieved in other advanced countries that spend far less than the U.S. on health care.

But the answer for those who care about low-income Americans is not to ignore deficit reduction. It’s to pursue sensible deficit reduction in a way that protects poor people now and ensures a more prosperous future for everyone.