In my last post, “Status Quo on the Budget Is Not Good Enough,” I discussed a report from the outgoing chair of the Senate Budget Committee, Patty Murray (D-WA), and explained how it epitomizes the lack of progress made on the massive debt problem which has developed since the Great Recession of 2008 -2009. The basic problem is that Senator Murray’s analysis simply does not recognize the seriousness of our debt problem as shown in the above chart. Right now our public debt (on which we pay interest) is “sitting” at 74% of GDP for a year or two, before it continues its rapid increase. This projection assumes an historically “normal” growth rate of 3% and no new recessions, neither of which assumption is assured. It also assumes that the sequester budget cuts and new top tax rate of 39.6% stay in effect. In other words it is a best case scenario based on current policy.
Breaking it down, the debt will continue to increase because annual deficits will continue to exceed the rate of growth of the economy. The main driver of these increasing deficits is the cost of the health care entitlements of Medicare and Medicaid. Medicare costs will increase rapidly because of the aging of the American people. Medicaid costs will increase rapidly because: 1) more low-income people are being covered by the ACA and 2) since the recession there are more low-income people to be covered. I certainly support expanded healthcare coverage but we have to figure out how to pay for it!
How do we contain the increasing costs of Medicare and Medicaid? We do it by controlling the overall rapid growth (at twice the rate of inflation) of healthcare costs in general, i.e. for private healthcare. How do we do this? See a couple of my recent posts either here or here.
Senator Murray, along with many other progressives, argues that we need more deficit spending in order to stimulate the economy and create new jobs. More jobs are badly needed but more deficit spending is the wrong way to get them. Then how? With tax reform among other things.
Based on the outcome of the 2014 elections, I am optimistic that something along the lines of what I have just described will be tried by the next Congress. We’ll soon find out!
I have now been writing this blog for just over two years. I usually write three posts per week and this one is #280. My top sources for background information are the New York Times and the Wall Street Journal. My own local newspaper, the Omaha World Herald, carries the Washington Post economics journalist, Robert Samuelson, whom I greatly respect.
A column of his discusses a recent report from the Senate Budget Committee prepared by its outgoing chair, Patty Murray (D-WA), entitled “The updated fiscal outlook and its implications for the budget debate next year.” To me this report clearly shows why there has been so little progress made in straightening out the budget over the past few years. Here are some highlights of the report:
“Both our current fiscal situation and the outlook going forward have significantly improved, meaning we need a budget approach more focused on jobs and growth, not just on cuts.”
“Deficits have fallen dramatically over the last five years, and projected debt and deficits have also declined.”
“Revenue losses due to the recession and slow recovery were significant enough to counteract nearly half of the improvement in projected deficits, which highlights the need for new revenue from the wealthiest Americans and biggest corporations as part of any future deficit reduction effort.”
“It is clear that we need a federal budget approach more focused on jobs and growth, not on cuts for the sake of cutting. That leaves Republican leaders with a critical choice.”
In my opinion there are two basic problems with Senator Murray’s analysis:
Deficits have indeed fallen dramatically from their very high level in 2009, but not far enough! Deficits are projected to rise back to 3.9% in just ten years, as shown in the first chart. This means that debt will keep growing indefinitely, as shown in the second chart. This is unacceptable!
We do badly need to focus on jobs and growth but more deficit spending is not the way to do it. Although immigration reform and expanded trade would help, fundamental tax reform, individual and corporate, is what is really needed to grow the economy.
Hopefully a new Congress will be able to move in this direction next year!
The New York Times has a story today, “A Dirty Secret Lurks in the Struggle Over a Fiscal ‘Grand Bargain’”, suggesting that there are really two reasons why the House-Senate Budget Conference Committee, chaired by Representative Paul Ryan and Senator Patty Murray, is unlikely to accomplish very much. The simple reason is that the Republicans will not support tax increases, on which the Democrats insist, and the Democrats will not support major changes to entitlement programs, on which the Republicans insist.
But the “dirty secret” (according to the NYT) is that Republicans don’t really want to trim either Social Security or Medicare, which many Tea Partiers receive, and Democrats don’t really want to raise taxes on the upper income individuals who support them. Furthermore, the deficit for 2013 was “only” $680 billion, and is expected to drop further in the next few years, while interest rates are so low that borrowing hundreds of billions of dollars each year is not expensive. In other words, just kick the can down the road. Let somebody else worry about the problem in the future.
My previous post “Nowhere to Cut”, based on the report from the Congressional Budget Office, “Options for Reducing the Deficit: 2014 – 2023”, picks 14 possible budget cuts or revenue enhancements out of a total of 103 such items listed. Just these 14 items alone amount to a savings of $566 billion over ten years, more than enough to offset half of the entire sequester amount.
For example, raising the eligibility age for Medicare to 67 would save $23 billion (over 10 years), using the ‘chained’ CPI to measure inflation for all mandatory programs would save $162 billion, tightening eligibility for food stamps would save $50 billion, taxing carried interest as ordinary income would save $17 billion, limiting highway funding to expected highway revenues would save $65 billion, reducing the size of the federal workforce through attrition would save $43 billion, limiting medical malpractice torts would save $57 billion, and modifying Tricare fees for working-age military retirees would save $71 billion. Just these eight savings total $456 billion and would offset almost half of the entire sequester.
What is so difficult about making a tradeoff deal like this? Isn’t this what we send people to Washington to do?