Promoting fears about the budget deficit is a major industry in Washington. The central theme is usually that we have out of control spending which will make us just like Greece in only a few short years. The policy take away from this story is that we have to cut Social Security and Medicare, and the sooner the better. This is just the idea put forth by Rep. Tom Cole (R-Okla.) in a recent piece that appeared on The Hill's Congress Blog.
Everything in this picture is wrong. The basic story of out-of-control deficits as an ongoing problem is nonsense. While people may have complained about the deficits in the Bush presidency, the debt-to-GDP ratio was actually falling by the end of his administration and was projected to continue to fall for the foreseeable future, even without the ending of the Bush tax cuts.
The factor that changed this picture was the economic downturn that followed the collapse of the housing bubble. The projections for deficits soared before President Obama even took office; the people who want to blame an Obama Administration spending spree for the deficit are missing the mark.
The problem of the current deficit is the problem of incompetent economic management that allowed the housing bubble to grow to dangerous levels. If we were back at a more normal rate of unemployment, the deficit would be at manageable levels. The people who are upset about today’s deficits should be angry at the Bush Administration and the Greenspan-Bernanke Fed. The deficit is filling the demand gap created by the collapse of the housing bubble and the resulting plunge in construction and consumption. The private sector is not going to fill this gap overnight no matter how much we might love it. In the current economic situation, lower deficits would just mean higher unemployment as the United Kingdom is trying to prove. The financial markets understand this fact, which is why they are willing to lend the United States huge amounts of money at very low interest rates (unlike Greece).
There are longer-term issues with the budget deficit, but this is overwhelmingly a problem of our broken health care system, not Social Security and Medicare. In fact, the Congressional Budget Office’s projections show that Social Security can pay all scheduled benefits through the year 2038 and even after that date pay 80 percent of scheduled benefits until the end of the century. While we would not want Social Security to ever pay less than its full scheduled benefit, 80 percent of scheduled benefits is far from nothing. Eighty percent of the benefits scheduled for people retiring in 2040 would still be more than an average retiree gets today.
If the gap is closed on the tax side, we could eliminate the shortfall entirely by eliminating the cap on the payroll tax. Alternatively, if we increased taxes by just one-twentieth of the projected increase in real wages over the next four decades, the program could pay all scheduled benefits for the rest of the century. Many people will be skeptical that they will see these projected pay increases because they have not seen wage gains for the last three decades. But this is the result of growing inequality. If we can fix that problem, Social Security’s projected shortfall is trivial.
Medicare is projected to pose a greater problem, but only if we don’t bring private sector health care costs under control. We already pay more than twice as much per person for our health care and this gap is projected to grow rapidly in coming decades. If we paid the same amount per person for our health care as people in any other wealthy country we would be looking at budget surpluses, not deficits. In fact, if the cost controls in the Affordable Care Act prove effective, then most of the long-term shortfall in Medicare has already been eliminated.
The hysteria over the budget deficit has distracted the country from its real problems. In the short-term, the focus of economic policy must be on restoring full employment. Tens of millions of people are seeing their lives ruined because the family’s breadwinner(s) are unable to find work. The longer term budget issue is really a problem of a broken private health care system. If health care costs in the United States were in line with costs in any other country in the world, then our deficit problems would be easily manageable.
This post originally appeared on The Hill's Congress Blog.