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.