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The Grand Bargain We Don't Need
President Obama has been meeting with small groups of Republican senators and representatives in an effort to reduce the damage of the so-called sequester -- the $85 billion in automatic budget cuts that took effect March 1. But these meetings, if successful, are likely to lead to greater economic and political damage, in the form of a "grand bargain" to cut Social Security and Medicare in exchange for some reductions in tax preferences.
This is a bad idea for several reasons.
First, in these deals, it's usually Democrats who get taken to the cleaners. Republican leaders insist that their rank and file members will never vote for progressive tax increases, so the tax part of the bargain tends to focus on closing minor loopholes while Republicans demand major spending cuts in return.
Secondly, the sequester is a grave problem not just because the cuts are automatic, but because they are a down payment on a decade of budget cuts that both President Obama and the Republicans have embraced. If we trade the $85 billion of automatic cuts in the sequester for $85 billion of some other cuts, the impact on the economy is just as depressive.
President Obama's own proposals support $4 trillion of deficit cuts over a decade, only slightly less than what Republicans demand. The deal that he made over New Years weekend to spare the economy the "fiscal cliff" cut taxes by over $3 billion. Some of this extended the Bush tax cuts for 99 percent of taxpayers, but a lot if it was in the continuation of tax loopholes for the well-off. Massive spending cuts are already baked into the cake for the next decade.
Third, Social Security and Medicare outlays are not what ails the economy, and the two programs tend to be wrongly lumped together in discussions of "entitlement reform." A characteristic recent piece in the Washington Post by liberal deficit hawks Isabel Sawhill and Harry Holzer substantially blames progressives for the current fiscal stalemate:
The reluctance of our fellow progressives to consider sensible reforms to entitlement programs is puzzling. Progressives must begin to acknowledge a hard fact: Our very expensive retirement programs already crowd out public spending on virtually all other priorities -- including programs for the poor and those that strengthen the nation's future
Sawhill and Holzer go on to argue that since Republicans will resist higher taxes, Social Security and Medicare are the main place to look for budget savings.
This line of argument is misleading on several grounds. It isn't Social Security and Medicare that are killing other social programs, but Republican refusal to support them.
The ratio of public debt to GDP is roughly stable for the next decade. If we begin making cuts now, whether in Social Security and Medicare, or in other outlays, we will slow the recovery. That will only worsen the debt ratio over the long term, and at a depressed level of economic output.
Republicans do resist higher taxes, but at times Democrats have prevailed in raising taxes on the rich -- with the full support of the voters. President Clinton managed it in 1993, and even President Obama, though he settled for too skimpy a bargain, got Republicans to vote for a $630 billion tax hike on the top one percent last January. Faced with a choice of cuts in Social Security and Medicare or tax increases on the wealthy, polls show that most voters opt for the taxes.
Social Security and Medicare face entirely different fiscal challenges. As even a budget-balancer like former OMB chief Peter Orszag has acknowledged, the current Social Security program will face cost increases of only about one percentage point of GDP over the next 75 years, largely because of the aging of the population.
We can bring the program into balance by lifting the lid on incomes subject to payroll taxes. Since Social Security is financed by taxes on wages, the program would be nicely in surplus of wages began rising with productivity again, as they did in the 30 years after World War II.
Medicare faces larger deficits, but mainly because it co-exists with a heavily commercialized larger health system. A remarkable piece in Time magazine, by Steven Brill, "Why Medical Bills Are Killing Us," explains how hospitals and doctors charge astronomical fees that have no connection to their actual costs. A single-payer system -- Medicare for all -- could drastically reduce the rate of medical inflation.
When someone like Dr. Sidney Wolfe of Public Citizen, or Sen. Bernie Sanders, or former New England Journal of Medicine Marcia Angell, calls for single payer insurance as the solution to our health mess, they are starry-eyed socialists. When Time magazine stumbles on this reality, it's news.
But whacking Medicare, either to pay for the sins of the rest of the health-industrial complex or to compensate for the Republican refusal to tax the rich, it is utterly perverse.
This supposed grand bargain, long promoted by centrist deficit hawks and their Wall Street allies, is bad economics, bad social policy, and bad politics for Democrats. So far, only the refusal on the part of Republicans to entertain more than the most token of tax increases on the rich as part of a bargain has saved Obama from himself.