White House Burning, Part II: Two Views of Government, a Long View of Debt
(By NCrissie B)
This week I am exploring Simon Johnson and James Kwak’s White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. Previously we considered the history of our federal debt and the relationship of government, money, and credit. Today we look at our long-term debt outlook. Next we’ll conclude with the authors’ proposals for a sustainable budget that preserves essential programs and services.
Simon Johnson is a professor of entrepreneurship at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a member of the CBO’s Panel of Economic Advisers and of the FDIC’s Systemic Resolution Advisory Committee. He was previously the chief economist of the IMF.
James Kwak is an associate professor at the University of Connecticut School of Law. In 2011–2012, he is also a fellow at the Harvard Law School Program on Corporate Governance. Before going to law school, he was a management consultant and co-founded a software company.
Johnson and Kwak founded The Baseline Scenario economics blog and also wrote 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.
The Party of Fiscal Responsibility
If the debate over our federal debt were really about the risks of debt, President George W. Bush and a Republican Congress would not have passed budget-breaking tax cuts in 2001 and 2003. Economic growth in the 1990s – fueled by Baby Boomers in their peak earning years, boosting both tax revenues and our overall economy – left a budget surplus in 2000. A fiscally responsible party would have recognized those Baby Boomers would soon be retiring, and proposed saving the current budget surplus to pay for the Social Security and Medicare benefits those Baby Boomers would soon need.
Indeed a fiscally responsible party recognized and proposed exactly that in the 2000 presidential election campaign. The party of fiscal responsibility were Democrats, as Vice President and presidential nominee Al Gore said:
We will balance the budget every year, and dedicate the budget surplus first to saving Social Security. Putting both Social Security and Medicare in an iron-clad lock box where the politicians can’t touch them – to me, that kind of common sense is a family value.
Texas Governor and Republican nominee George W. Bush proposed not fiscal responsibility to prepare for the future, but tax cuts to boost current consumption:
I believe that cutting the taxes will encourage economic growth. I believe cutting all marginal rates will keep the economy growing. I believe we ought to get rid of the death tax. I believe we ought to get rid of the earnings test on Social Security. I believe we ought to mitigate the marriage penalty. I believe we ought to use this time of prosperity to get money out of Washington and into the pockets of the taxpayers.
That pattern has not changed over the past twelve years. While Mitt Romney and Paul Ryan howl about our federal debt, their budget proposal is vague and the Committee for a Responsible Federal Budget estimated that it could push the debt up to 96% of our GDP by 2021.
How did Republicans become the party of fiscal irresponsibility?
Two views of government
Conservatives often call for a “return” to our nation’s true roots of: limited government, little regulation, and low taxes. Yet as we saw in E.J. Dionne’s Our Divided Political Heart, that history is more myth than fact.
However, Johnson and Kwak note that scientific and technical advances increased the scope of government. We learned how public utilities could reduce disease and improve public health, and the need to weigh the risks from pollution against corporate profits. The Great Depression highlighted the need for insurance to ease the suffering of market failures and allow seniors to retire with dignity. Science and technology also increased the need for a better educated population who could both develop and use new technologies. And as advances in medicine pushed health care costs beyond families’ budgets, we saw the need for effective, affordable health insurance to pool the risks. This was less a “government takeover” than increasing awareness that the often brutal hardships of middle- and low-income families’ lives were not inevitable.
Faced with that choice, the authors write, the inevitable result is redistribution of wealth. The only question is who the redistribution favors:
In a low-tax/low-benefit world, your bank account is a little bigger (if you make enough to pay taxes), but you face more risk of running out of money in retirement or not being able to afford health care; in a high-tax/high-benefit world, your bank account is a little smaller, but you face less risk. Since rich people are better able to self-insure, they gain less by pooling their risk with other people, so they might be better off in a low-tax/low-benefit world; poor people cannot self-insure, so they gain the most from risk pooling, and they will be better off in a high-tax/high-benefit world. Compared to current policy, reducing benefits so we can keep our low tax rates is a form of redistribution from the poor to the rich; raising taxes so we can maintain today’s benefit levels is a form of redistribution from the rich to the poor (assuming that the tax increases are progressive).
Thus we get then-Rep. Dick Armey (R-TX), now chairman of FreedomWorks, admitting why Republicans really talk about deficits and the federal debt:
Balancing the budget in my mind is the attention-getting device that enables me to reduce the size of government. Because the national concern over the deficit is larger than life. [...] If you’re anxious about the deficit, let me use your anxiety to cut the size of government.
Or, at least, to cut taxes. Tax cuts are usually popular, but spending cuts are not. So the Republican playbook has been to cut taxes but not spending while a Republican is in the White House, then howl about deficits and force fiscally responsible Democratic presidents to take the political fallout for raising taxes or cutting spending.
A long view of debt
That understanding sets the stage for the authors’ long-term outlook for our federal debt. Our current $11 trillion debt is partly due to the 2001 Bush tax cuts ($3 trillion), partly due to the wars in Iraq and Afghanistan ($1 trillion), and mostly due to the 2008 financial collapse that cost nine million jobs and wiped out an estimated $7.8 trillion in projected GDP growth from 2008-2018. That lost revenue coincided more families eligible for unemployment benefits, Medicaid, Temporary Assistance for Needy Families, the Supplemental Nutrition Assistance Program, and tax expenditures such as the Earned Income Tax Credit and Child Tax Credit. Many displaced older workers also chose early retirement and applied for Social Security benefits.
Our current fiscal crisis will pass, but the long-term debt dangers lie in our primary government insurance programs: Social Security and Medicare. For Social Security, the issue is simply that more people will soon retire and they will live longer. Thus, their benefits will exceed then-current Social Security revenues and deplete the program’s existing trust fund.
For Medicare, those issues are compounded by rising health care costs. That is partly a function of medical advances that offer new tests, new drugs, and new procedures, such that treatment for a given illness costs more now than it did even two decades ago. It’s also partly a function of our fee-for-service model that spurs providers to prescribe as many tests, drugs, and procedures as insurers will reimburse. The authors acknowledge that the Affordable Care Act attempts to limit the growth of health care costs, but argue there isn’t yet enough data to know whether or how well those provisions will work. Their projections assume health care costs will continue to rise as they have the past two decades, and that would create a serious, long-term debt Medicare debt risk.
But as the authors emphasize, privatizing Social Security and Medicare would not eliminate or even reduce those costs. Indeed, turning those tasks over to private, for-profit investment firms and health insurance companies would likely increase net spending for retirees, with the costs borne by retirees and their families or – for those who could not afford it – other public programs that shelter and care for the indigent.
The Baby Boomers will retire, and will need health care in their senior years, and we will all pay for it, one way or another. Given that, the authors argue, both moral and economic factors suggest we should preserve Social Security and Medicare in their current forms, which are less expensive and far less cruel than the alternatives.
But there’s no such thing as a free lunch … and tomorrow we’ll see how they propose to pay for the government we need.
(Crossposted from Blogistan Polytechnic Institute (BPICampus.com))
Tags: Barack Obama, budget deficit, Committee for a Responsible Federal Budget, federal debt, Grover Norquist, James Kwak, Medicaid, Medicare, Mitt Romney, Paul Ryan, Simon Johnson, Social Security, White House Burning
