A number of folks in recent weeks have questioned or criticised my views, both here at OTE and on TV, regarding endorsing spending cuts, including some targeted at the social insurance programs Medicare and Social Security. So let me expand a bit on those views and what I believe is a balanced take on these highly charged issues right now.
First, I can’t be held accountable for what I say on TV—kidding! But I would ask that folks don’t pull out one phrase or sentiment in one segment. It’s true that one has to mind one’s words carefully on TV but you can go too far with that and say nothing. So while I’m sure I lean too far over my skis at times on the airwaves, where you can’t edit yourself, I’d ask my critics to read what I write up here and to listen to more than one segment on more than one show before deciding where I stand.
On fiscal matters, while I’ve been a loud voice for avoiding austerity (including bemoaning the demise of the payroll tax break this very AM on MSNBC’s Alex Witt Show), I’ve also argued that we need to chart a course such that eventually our public debt starts growing less quickly than our GDP.
In this regard, I’m what you might call a cyclical deficit dove and structural deficit hawk. In downturns, or any period like this with highly elevated unemployment, the most important fiscal question is whether our budget deficits are large and stimulative enough to offset the private sector contraction. In periods of strong growth, the deficit should move toward primary balance, which by definition leads to a decline in the debt/GDP ratio.
I’m also a strong believer in an amply funded government sector that is able to respond to market failures, which guys like me see around many more corners than the typical economist, and structural budget deficits undermine our ability to respond as needed.
Of course, the question is how do we get there: through cutting spending or raising taxes? The politics points strongly toward both—I don’t believe there’s a deal out there that achieves the goals outlined above without changes on both sides of the budget ledger. But the economics points toward balance as well.
I’ve long and loudly advocated for new tax revenues and in fact have gone further than most.
But I think the mandatory side of budget—the part that funds the entitlements—must be on the table as well. In fact, as I’ve stressed in many posts, we’ve already cut too deeply on the non-defence discretionary side, where programs to aid states, fund Head Start, support college access, even provide health services for vets, are already compromised (the defence side hasn’t been held harmless either but it has many more Congressional champions than the non-defence side).
Though they require a grain of salt (see end of this discussion), I generally believe the predictions that the growth of health care spending, private and public, will continue to outpace that of GDP. That means an increasing share of GDP growth goes to paying for health care. Some of that is inevitable given demographics, but most of it is due to excess health-care cost growth. This must be dealt with or inefficient US-style health care (other advanced economies spend much less on health care) will crowd out other stuff we want and need.
At the same time, as I also incessantly stress, most retirees depend on Social Security and Medicare and can’t afford benefit cuts. So that means that any cuts should a) come from squeezing out the known inefficiencies from the delivery side of health care system (our current system rewards providers for quantity over quality), b) not target economically vulnerable individuals. As a rule, I’d avoid further raising eligibility ages in both programs.
So let us run these criteria by the ideas on the table. The President’s $350 billion or so in mostly Medicare cuts (it’s harder to find cuts in Medicaid that meet the above conditions) are mostly from ‘a’ above, things like incentivizing efficient hospital care and using Medicare’s clout to bargain for cheaper drug prices in Part D. But he also suggests increasing premiums on parts B and D on high income beneficiaries.
In fact, some of this is kind of baked in the cake with new taxes starting next year: an additional HI payroll tax of 0.9% on earnings above $250,000 and an ACA measure that taxes unearned income at 3.8% to support Medicare. I suspect critics of means-testing entitlements feel better about that, but to me they’re pretty close and reasonable policy measures, IMHO.
As per Social Security, this post has a list of fixes to close the funding gap. Clearly, in an era of much higher wage inequality, raising the maximum earnings threshold makes sense as a larger share of earnings is over the cap (why this fix has gotten lost in the recent debate is an important question for the program’s advocates). I like the Domenici/Rivlen idea to gradually apply the payroll tax to employer-provided health care benefits. Rather than means-testing, I’d support a lowering in the “bend-points” affecting the wealthiest beneficiaries, but we must be guided here by the fact that for a large majority of retirees, Social Security is their main source of income. It’s true that Warren Buffet doesn’t need Social Security. But that shouldn’t guide policy.
My views on the chained-CPI—a benefit cut—are here. I support the change—it’s a more accurate measure of price growth (though a chained index for the elderly would be better), and I’m sure it’s coming, so I want to get something for it. That ‘something’ is an offset from the benefit cut for poor, old elderly. But I agree, and stress in the post, that there are reasons to be nervous about the change.
So, there you are. I’m sure many disagree and I’m happy to have constructive arguments about all of the above. There’s a lot of nuance here, I think, and I know—my bad—it sometimes gets lost on TV. Often, I’m trying to emulate balance and compromise, which as both a Buddhist and policy wonk, I highly value and believe are very much missing in today’s debates.
But I know that I sometimes push them too far in ways that are inconsistent with my values and those of many of my readers and listeners. Clearly, in trying to be too balanced, one can be imbalanced. We are all works in progress.
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