Fiscal Follies

President-Elect Obama is planning to convene a "fiscal responsibility summit" some time in February, the Washington Post has reported. Obama floated the idea at a conversation last Wednesday with Post editors, specifically flagging Social Security and Medicare.

The rhetoric and framing of the problem are distressingly similar to efforts of the newly formed Peter G. Peterson Foundation, Robert Rubin's Hamilton Project, and the Concord Coalition, and kindred groups that seek to define long term budget discipline as the Republic's top economic problem. The Peterson Foundation was founded last year, with a pledge of over a billion dollars out of Peter G. Peterson's own personal fortune. Peterson hired the former U.S. Comptroller General, David Walker, as the new foundation's president. Walker has taken his road show to foundation executives and other opinion leaders, trading on his bipartisanship and record as a former public servant of integrity.

Another of the fiscal hawks, Maya MacGuineas, who runs the Committee for a Responsible Federal Budget, has joined with the Peterson Foundation and the Pew Charitable Trusts to create a Peterson-Pew Commission on Budget Reform. This follows on an essentially similar Brookings-Heritage Fiscal Seminar. The trouble with all of these efforts is that they all point in the same direction. But beneath the fiscal high-mindedness lurks a very conservative agenda, to cap the one part of American's patchwork system of social insurance that actually delivers reliable benefits. I wrote about an earlier skirmish between relatively liberal and more conservative budget hawks last September in the Prospect (Obama versus the Fiscal Fear-Mongers).

The Peterson Foundation's basic storyline goes like this:

Government is fundamentally "broken" because of $56 trillion in "unfunded liabilities." Generations to come will be stuck with the bill, because "we" have been irresponsible in allowing "entitlements" such as Medicare and Social Security to make promises that they can't keep without bankrupting the economy. Too many of the beneficiaries of social insurance programs are either elderly or affluent, at the expense of needier people. The poster children for the story line are, well, children. Supposedly, if we reined in Medicare and Social Security, there would be more to spend on other social needs such as housing, children's programs, and other anti-poverty efforts. You can read the Peterson Foundation's pitch for yourself at pgpf.org.

Just about everything in this story is wrong. I recently had the pleasure of debating Eugene Steuerle, Vice President of the Peterson Foundation, before an audience of New York foundation executives. Here is an abbreviated rebuttal.

For starters, the supposed $56 trillion conflates real debts on which interest is being paid with projected future outlays taking a worse case scenario. The current public debt is about $6.3 trillion or about 40 percent of GDP. (The national debt, which includes money that one government agency owes to another is over $10 billion.) The public debt was far higher--over 100% of GDP--at the end of World War II, yet the economy began a 25 year boom and the debt ratio quickly came down.

Why? All that debt ended the Great Depression. Wartime spending, as a side effect, put people back to work, recapitalized American industry, invested in science and technology, and created pent up demand for consumer goods. The debt was paid down rapidly after the war.

The situation today is similar. We could easily tolerate a ratio of public debt that peaked at, say 70% of GDP, well below the WWII peak, if that's what it took to avert a second great depression. And then we could start paying it down once recovery came, as we did after the war. My own view is that we need expanded public spending to avert a depression, about a trillion dollars a year for two years; and most economists think that Obama is at risk of aiming too low, not too high. Obviously, increased deficits and debts in the short run are preferable to a second great depression.

The Peterson Foundation's second sleight of hand is the effort to conflate Social Security and Medicare. Social Security's projected deficit is within the statistical margin of error--about one-third of one percent of GDP over 75 years. And Social Security, which is financed by taxes on wages, would have huge surpluses if the wage share of productivity growth hadn't been shrinking for the past thirty years. If we could restore decent wage growth, Social Security's much exaggerated problems would vanish.

For many of the people who want to cap or privatize Social Security, the supposed concern for its deficit is an ideological assault masquerading as a fiscal anxiety. The conservatives who wanted to privatize Social Security showed no comparable fiscal worry when the three Bush tax cuts consumed a budget surplus that might have been applied to Social Security trust funds.

Medicare does face a serious shortfall, but as Henry Aaron of the Brookings Institution keeps pointing out, you can't seriously talk about Medicare without addressing the dysfunctional health system to which Medicare is attached.

Here, too, this is really an ideological and philosophical argument, not a fiscal or a technical one. No reform is possible if we keep the present health system, with its wasteful misallocation of scarce resources, in which money goes to procedures that are profitable rather than those that are most cost-effective medically, and in which private insurers take out 20 or 25 cents of every premium dollar.

America now spends 16 percent of our GDP on health, and the number of uninsured and under insured rises every year, in tandem with the costs. Other advanced countries manage to insure everybody for less than ten percent of GDP. They have better health outcomes than we do, because health outlays are efficiently targeted. We have more rationing than any other nation, and we have the most pernicious kind of rationing - rationing based on the private ability to pay for good care.

The present path leads inexorably to cost-containment via further reductions in coverage. It leads to capping Medicare by turning it into a voucher, and a worsening of the two class health system, with more cost-shifting to patients and even less efficient allocation of scarce health resources. And it leads to further stresses on primary care doctors, who have been subjected to a speed up in the number of patients they see and a reduction in compensation, leading to a deterioration in care.

It is unconscionable to speak of the Medicare imbalance as primarily as a problem of cost. It is a problem of a dysfunctional system, which can only be resolved by shifting to a universal system that saves money by financing health coverage universally and socially. If we shift to a universal system, we could easily cover everyone for far less than 16 percent of GDP, and have net savings to the economy as well as better quality care.

As for poster-children, when progressives fight for more funding for kids, or housing, or higher wages, or to plug the other gaps in social policy, the Petersons of the world never seem to materialize.

Those who warn about public spending increasing deficits and debts often deliberately confuse two entirely distinct issues. First, how large a share of the entire economy should be invested and spent socially; and second, how large a deficit is wise. Before the current crisis, public spending had been running at about 20 percent of GDP, and revenues had been fluctuating between 16 and 18 percent. The difference is the deficit. Once the crisis is behind us, I would like to see federal spending rise to about 25 percent of GDP; and I would like to see the federal budget at, or very close to balance, over the business cycle. We can do that by increasing taxes on people like Pete Peterson.

Given what financial deregulation has done to the economy, it's revealing that people like Peterson have spent three decades warning about impending fiscal collapse, but have not said word one about the far more serious risks of the kind of market fundamentalism that built their fortunes.

What crashed the economy? It sure wasn't the national debt or worry about "unfunded liabilities."

So, just how will President Obama define fiscal responsibility, who will he choose to showcase, and to what end? It will be interesting to see whether his fiscal summit features people like Pete Peterson, David Walker, and Robert Rubin, and lends credence to their story--or whether he also gives the floor to their critics.

You can understand why, as matter of fiscal tactics, Obama would need to signal that it is possible and necessary to rely on large deficits in 2009 and 2010 to avert a recession, and then to get serious about fiscal discipline over the next decade once the economy has returned to decent growth. He needs to argue this to reassure the Blue Dogs in his own party, to win over some Republicans, and to get support of opinion leaders for his recovery strategy.

But there is more than one road to fiscal discipline. One entails gutting the few program that have survived the rightwing assault on social insurance. The other involves filling in the appalling gaps in social insurance and achieving fiscal balance by restoring the principle of taxation based on the ability to pay.

Once again, our new leader, who has inspired so much hope and who so wants to be a post-ideological president, needs to grasp that these are deeply ideological questions. To pretend otherwise is to allow the conservative version of the story to govern by default.

Robert Kuttner's new book is Obama's Challenge; America's Economic Crisis and the Power of a Transformative Presidency. He is co-editor of The American Prospect.

Comments

[joebhed]

I posted earlier my comment on the Peterson Crew :) preparing to shrink the government for that final flush and how it was the debt-money system of the Federal Reserve that IS the problem.

Please take a quick read of this item from a source I rarely cite.
It is a short piece written by financial linguist Steven Lachance on "How Debt Money Goes Broke"

http://www.financialsense.com/fsu/editorials/2005/1212b.html

BROKE !
As in, INSOLVENT !

As in, as WE ARE !

Please read it.

[WorkingClass]

Cut military spending in half. Give the military two years to adjust. Then cut it in half again. We would still be spending more than Russia and China combined.

[TJCole]

Peter Orszag Obama's Budget Director, has done some of the best work on the rising cost of health care and this has little to do with the baby boomer increase but pure inflationary cost increases and systemic fraud with this largely corrupted industry...

[FearlessFreep]

Controlling the deficit isn't everything, but it isn't nothing either. The tax cuts in Obama's stimulus should be balanced with tax increases.

[kenstremsky]

The national debt was less than 1 trillion dollars on January 20, 1981. It took us more than 180 years to accumulate it. In less than 28 years, national debt increased by 9 trillion.

We may want to think of many different ways of funding social security and medicare. I discuss several on my website. You may find my website address on my profile.

Congress needs to reduce the probability of high inflation by eliminating the Federal Reserve or veto many Federal Reserve decisions. If the United States Senate wants a Federal Reserve decision to be vetoed, it should be vetoed. If the United States House of Representatives wants a Federal Reserve decision to be vetoed, it should be vetoed.

A recent column on http://www.newgeography.com discussed inequality. I have posted comments after several columns on newgeography.com

Sincerely,

Ken Stremsky

[joebhed]

The Peterson group is preparing for that final flush of democracy down the drain by merely pointing out the bankruptcy of the government.

That the government would end up bankrupt was the inevitable result of putting the private bankers in charge of a debt-money system to run the economy.
That debt-money system has arrived at its point of implosion.

You remember all those inclining curves running off the paper about now.
Those lines are representative of the fact that the debt-money economy has reached unmanageable levels of debt-servicing, which is a nice way to say that, as a player in the global economy, we are broke.

The banking sector of the financial system is truly insolvent.
Who was in charge of that banking system?
The so-called Federal Reserve Bank was totally responsible for the commercial banking sector, and it allowed the investment banking sector to be self-regulated.
Obama now proposes to place the head banker at the New York FED in charge of the United States Treasury, whose job is to protect the American taxpayers.
That is how this system works.
Inevitably, the government will be bankrupted by the scale of both the national debt, and the financial liabilities that the private FED bankers have placed upon the American people.
Change the debt-money system, and you change the power that Petersen has over the debate.
Because, Peterson is right.
The problem is the debt.
And the debt-money system that created it..

[ld]

It's beyond loathsome for the same Republicans who supported the Tarp/Giveaway and the spending on totally unnecessary Iraq to object to spending on Social Security and Medicare.

[rich misty]

Republicans are in fact beyond loathsome

[NABNYC]

We need a national healthcare program. It should include all people who earn below a certain amount, everyone over the age of 50 and from birth to 21, and anyone who is unemployed. After that, for working people in the in-between years, they should be allowed to opt in or select a private program that they pay for if they so choose. We must include full dental care (non-cosmetic).

The government then needs to hammer the doctors and hospitals to bring the prices down. I sometimes calculate what my doctors and dentists are earning based upon office visits and charges for procedures. Most of them are grossing well over $1.0 million per year. This needs to end. They could live quite comfortably on a lot less money, but the feeding trough has been flowing their way for too many years and they won't give it up voluntarily.

We should have clinics throughout communities with nurse practitioners to handle routine matters. And we should set up publicly funded medical, nursing, and nurse practitioner schools, and pay 100% for any student who meets the academic requirements and agrees to serve 10 years in the national healthcare system. We need to stop the AMA's stranglehold on doctor salaries and its continuing exclusion of people other than white males.

[pogo]

I wonder how many doctors would be grossing over one million per year if their grade point averages were posted on their diplomas?

[Bladernr1001]

My family doctor does pretty well but I know he does make anywhere near 1 million/year. I knew a heart surgeon specialist who told me he netted about $350,000/yr. Specialties are the highest paid. General practicioners make far less. They all have costs....office, nurse assts, malpractice insurance, supplies, overhead, etc. Many doctors may have gross sales of more than $1 million/yr but the actual profit is far less.

So how would you "hammer" doctors and hospital;s to bring their prices down? That sounds like a very socialist approach to cost reduction. And who would decide at what level of income "living comfortably" would entail? Trying to control what these people make sounds like a good way to discourage the best and brightest from entering the profession in the first place.

I do agree with your idea that nurse praticioners should be certified to do many things a doctor does. The AMA has fought this for years because it would reduce the incomes of some doctors. There are many laws and rules that would have to be changed to accomplish this.

[NABNYC]

You lower prices by demanding a bulk rate discount. If the doctor wants to serve those customers, and be part of the program, they have to accept the discounted prices. Just for one quick example: my local mammogram doctor charges $260 for a routine mammogram screening. Except if you're in a group health program, in which case it's only $130.00. That's because the doctor gives a bulk rate discount so they can serve customers in that (large) insurance group. That's what I mean by "hammer" the doctors and hospitals: set a fair rate and don't let them charge ridiculous amounts.

As far as medical school requiring the best and the brightest, that's a myth. It's used to discourage non-male, non-whites from applying to medical school. But in the former Soviet Union, the doctors were all women. Being a doctor requires memorizing a lot of information about bones, muscles, etc. -- much the same information as is learned in nursing school -- but does necessarily require that people be all that smart. I know lots of doctors, and they're not so smart. It's more a memorization combined with limited judgment. What makes a good doctor is a caring for the patient, willingness to take the required time to figure out what's going on, and unwillingness to put the patient through unnecessary tests just to run up the doctor's income.

[DuganS1]

We already have a healthcare program that includes all people who earn below a certain amount - it's called Medicaid. It doesn't include non-US citizens, however, and such folks make up about a third of the 50 million people that are currently without health insurance. Most people that don't have insurance are the working poor that can't afford it and their companies don't offer it or younger people 18-25 who can afford it but chose not to buy it because they have other priorities. I just don't see how covering everybody would reduce costs. That just doesn't make sense. The core of the problem is cost and that is because people seek too many unnecessary treatments (ErectDys drugs, anti-depre­ssant/anxi­ety meds, visits to counselors­/psycholog­ists/psych­iatrists, MRIs, blood pressure/c­holesterol meds instead of diet/exercise). About high salaries, you can solve that with the tax code. Most medical/nursing schools already get large amounts of govt funding and students get govt grants and low interest loans.

[Merewen]

"The core of the problem is cost and that is because people seek too many unnecessary treatments (ErectDys drugs, anti-depre­ssant/anxi­ety meds, visits to counselors­/psycholog­ists/psych­iatrists, MRIs, blood pressure/c­holesterol meds instead of diet/exercise). "

Are you a Doctor? I ask because I'm trying to figure out how YOU know what an individual citizen needs as far as medical treatment goes.

Illegal immigrants working with a fake SSN pay taxes. They just can't get a refund.

The Medical profession probably wouldn't charge so much if they didn't have outrageous amounts of loans to pay back.

[mikekopac]

you should do some research on doctors earnings try this out

http://www.payscale.com/af/aol/calculator.aspx?country=United+States&af=2539&src=2539start&jobTitle=medical+doctor&city=&state=Pennsylvania&x=62&y=6

or jobs.aol.com

you will feel better when you see what they really earn

you also should consider that Docs go through four years of medical school,(hundreds of thousands of dollars of debt) followed by an internship and residency where they work 36 hour shifts. Then they get to work in a field where every decision affects a life AND you can sued for your mistakes

[indiamerican]

Mr.Kuttner is propagating a philosophy that insuring everyone will ensure lower healthcare costs to the nation. But single payer system is not without its flaws. Look at the VA. They are always trying to deny the veterans their medical care. Medicaid and disability will turn you down at first attempt before they see if you have a genuine need. Bloated government bureaucracies will demand that the services be reduced or that certain services are unnecessary to save costs. Then there are the physicians who will collect public pay checks and cut time to see private patients who pay a little more. Or they will put their private patients in public beds. Agreed that the current system is filled with thieves big and small. But the same thieves will change their modalities in the single payer system. Obama's biggest challenge in healthcare will be ensuring that the people who need medical care get it no matter the system.

[TXfemmom]

We must go to a single-payer sytem and remove some of the greed thing. There is every bit as much of that within medical care as there was on Wall Street. Make every employer and employee pay into it, every self-employed, everyone. Then, for employers such as WalMart, where they pay very little to their employees, they would be assessed an additional surcharge based upon profits made by a company which would not otherwise pay enough for their employees.

Then, pay what the rest of the industrialized world pays for medications and technology. The French pay half as much for medications and half as much for expensive technology and the companies still make a profit and sell to them. We have to get tough if we are going to be able to compete with the rest of the world.

[Bladernr1001]

The problem with removing the "greed thing" as you call it is that quality of care decreases as many report in existing single payer systems.

[pogo]

So, give us an example of these "many" who report that the quality of care decreases in single payer systems.

[ImmanuelGoldstein]

Baloney. I have talked to people in countries with single payer systems, and to a one they love it and thing we are crazy for not having it ourselves. The fact is that they get better outcomes with less money has been reported in the above article.

And in the big picture, look at France, England, Canada, Japan and practically every other democracy that has a national health care system. Do you see ANY political agitation to move to the American system? I assure you any politician that did so in these countries could count his or her remaining career in MINUTES.

You know, I have stopped engaging creationists and global warming deniers because they never stop using an argument no matter how many times it's been refuted. They literally have no honest arguments at all.
I'm beginning to feel that way about opponents of universal health care. For my part I'm starting to believe there is no real debate left on this issue.

[Eres]

The only way through and beyond the crises is to adopt the single payer system a majority of European countries have to ensure that each and every one of us has access to quality health care services.

You will never meet a French, German, Swedish, Danish, Dutch (the list goes on) citizen who would trade their health care system for ours. Enough of the propaganda -- the evidence speaks for itself. Americans are getting robbed from every angle and adopting a single payer system should be the first item of priority for stemming the hemorrhaging.

[Rog49Thomas]

Yes but if we adopt a rational system that benefits everyone - wouldn't that be dangerous and possibly even (gasp) socialism?

[LewisWalsh]

And what is wrong with socialism as it is practiced in those countries mentioned by Eres? These are countries that have democratically elected governments. The people not only get better health care than people in the US, but they have better public education, free higher education and better protections against arbitrary action by employers. And, according to UN studies, these populations are happier than Americans. Why wouldn't they be, what in blazes do they have to worry about. If that word socialism bothers you, perhaps you can call it "not on your own ism."

[TRex86]

Both sides are right--speaking past each other. Fifty six trillion of unfunded liabilities is mostly Medicare (36); Social Security and federal pensions, the remainder, are about equal. Medicare is the biggest problem, but this doesn't gainsay its elimination. Au contraire, it's time to initiate a national Medicare safety net for all citizens with viable long term financing.
What neither party mentions is funding. Social Security's regressive payroll tax is the highest tax paid by 75% of Americans. As an inter-generational wealth transfer it accounts for much of the pauperization of young workers and is structured like a Ponzi scheme. Yes, it is "solvent" for years, but this misses the point. Kuttner mentions that half of the federal debt is owed from one branch of the government to another. It is surplus Soc Sec revenues that have been diverted to offset income tax deficits.
Hence, we have an opportunity to restructure financing of the Entitlements and shift it entirely onto the progressive income tax. Our current disaster is a blessing. The threat of a deflationary crash demands that the feds print money and spend it. They can get away with huge deficits in order to spend their way out of this mess. Why not then put in place reforms that shift the cost of the federal government onto the progressive income tax and initiate plans to pay down (internal and external) debt once the economy is rocketing along.

[DuganS1]

"Hence, we have an opportunity to restructure financing of the Entitlements and shift it entirely onto the progressive income tax. "

This is what I've been saying for a long time. It would increase disposable income for lower income folks and relieve costs for businesses, particularly small business. It would also eliminate an incentive for off-shoring and eliminate a cost advantage of foreign import competitors.

[TRex86]

Amen, Dugan. Ever wonder why the most obvious solutions never get mentioned?

[LewisWalsh]

A social system that does not carefully control human greed is destined to oblivion. Were personal wealth is allowed to grow beyond reason, moral code or human need, survival becomes problematical. Such a social system facilitates the rise of the most unscrupulous to prominence and control.

I have great sympathy for President-Elect Obama, for history is likely to hold him responsible for the disintegration of a promising young society. The concentration of political power that has been brought about through the concentration of the national wealth is an established fact that is unlikely to be changed.

It is almost comical that those such as Peterson, who control vast personal financial empires, are attacking the minuscule benefits of the rest of us. Perhaps, if those individuals would make an effort to better control their thirst for riches and power, they would come to realize that sufficiency in wealth and sharing are important human values.

[DuganS1]

Don't forget that human greed is found throughout bureaucracy as well as the private sector.

[TRex86]

Peterson's writing is actually rather thoughtful, expressing a sense of stewardship, ie, responsibility for the fate of future generations. It is not an echo of the current Republican greedfest. This is not an argument that requires taking sides. All parties need to sit down and take a clear-eyed look at both the promises and burdens that lie ahead for future generations. We have the wealth to assure adequate health care and a decent retirement for all Americans. We don't have the will to confront the powerful interests that profit from the status quo.
Modest proposals:
1. Consolidate Medicare and Medicaid into one federal program funded with income taxes (and temporarily with deficit spending). Make it available to everyone under 350% of poverty and older than 55. Take Medicaid off the backs of the States.
2. Eliminate the payroll tax. Fund all federal programs with progressive income taxes and deficit spending. Repeal the Bush tax cuts. For now make it lots of deficit spending (see no. 3).
3. New New Deal. Jobs for all that can work repairing our neglected infra-structure. Public works projects. Solar farms. Wind farms. School modernization. And the Arts. Spend lavishly. Every dollar brings back two.

[LewisWalsh]

Your ideas have merit, but, "All parties need to sit down..." I don't think that you, I or anyone like us will be invited to the table. The lords of our fiefdom will be present to extract what they wish from their half hearted and naive counterparts. Obama will soon have a rude awakening. He will discover that there exists that certain ideology that is not amenable to fairness and reason.

[AnnfromCA]

Health care is a must in the coming years. We'll see lots of bumps in our economy. We simply can't go through that while panicking over loss of health care benefits, too.

[jimjaf]

once you get beyond the fun of bashing the bean counters, you've gotta face the reality is that the only way to curtail cost growth is to contain service growth. kuttner talks about administrative expenses, but then says medicare can't be fixed without more comprehensive reform. but medicare's administrative expenses are quite modest. better argument is you could fix the system by putting everyone in medicare -- if administrative expenses were the real issue.