Tuesday, May 17, 2011

The Policy Dispute Underlying the Debt Limit Debate

As the debate about the debt limit heats up over the next few months, there will be continued mention that the fiscal path we are on is unsustainable. Some will argue that the best way to correct that is to "tear up" the U.S. government's "credit card." Many of the arguments of those opposing an increase in the debt limit will be foolish, and it will often be hard to tell whether the speakers believe them or not. However, for all Speaker Boehner's tough talk, which I take to be a negotiating position and an attempt to placate the new members of his caucus, it is fairly clear he recognizes that he has a responsibility to get an increase in the debt limit enacted before a default of some sort occurs. As some people continually need reminding, the need to increase the debt limit is the result of laws Congress has already passed.

While there are some clear political reasons that the Congressional Republicans will take this to the brink, there is also a genuine policy dispute underlying this. The aging of the U.S. population dictates that Social Security and Medicare will take a larger share of the GDP than they have in the past unless the programs are made substantially less generous. These programs, though, enjoy broad public support. If the programs are not made less generous, taxes will ultimately have to be increased. This does not necessarily mean a general increase in marginal tax rates, because tax reform measures, reduction of many "tax expenditures," and, perhaps, the introduction of a value added tax, which most other industrial nations impose, could serve to generate more revenue.

Those who want to resist tax increases have seized on the current deficit and the need to increase the debt limit as a way to force changes in "entitlements." They point to polls that state that Americans want the deficit to be reduced and do not favor an increase in the debt limit. They glide over the fact that the principle causes of the current deficit include the Bush tax cuts, which have now been extended with the agreement or acquiescence of the Obama Administration, the poor economy, and defense expenditures due to military intervention in Iraq, Afghanistan, and, now, Libya. Also, leaving aside defense expenditures, they do not explain how cutting government expenditures currently will help grow the economy, which is necessary for the reduction in the next few years of the current budget deficit

The problem for those seizing on the current economic and political situation to make changes or "massive cuts," as Stanley Druckenmiller favors, in entitlement, as well as recuing current government spending, is that once one departs from generalities and offers specifics, the public is not pleased. References to the need to be "adult" or "serious" about this do not change this reality.

In a previous post, I have argued that the public's concern about the deficit is in reality a reflection of anxiety concerning the current economic situation. Nevertheless, the current demographic situation does suggest that something needs to be done about the long-term fiscal situation. Since the public hates both tax increases and spending cuts, some mixture of the two would seem to be in the offing. But, eventually, we will need to make more changes to our health care system, of which Medicare is a part. The U.S. has higher administrative costs than other industrial countries and spends more per capita on health care but has little, if anything, to show for it in terms of public health results. As the current disputes on the recently enacted health care law indicate, making more changes will be difficult, but I believe it is necessary and this will become clearer over time. All health care systems have their problems, but we need a better system than we currently have.

(On health care issues, I continue to recommend T.R. Reid, The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care. In an afterword in the paperback edition, Mr. Reid writes about "Obamacare": "But the sad truth is that, even with this ambitious reform, the United States will still have the most complicated, the most expensive, and the most inequitable health care system of any developed nation. The new law won't get us to the destination all the other industrial democracies have reached: universal health care coverage at reasonable cost.")

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