Am I a deficit scold?

I don’t think of myself as such, and think I have been consistent in saying that long run deficit reduction and shorter term economic growth should be the priorities. The Prologue of my book Balancing the Budget is a Progressive Priority says this:

As we head into the 2012 election, the task remains the same: we need to undertake policies to improve our economy in the short run, while seeking a long run plan to move slowly toward a balanced budget in the future. To achieve the latter will require some profound reform of our health care system and an increase in the proportion of the economy collected in taxes. There are other issues to be gotten straight, but without addressing those two realities (taxes are too low given any plausible level of federal spending and projected health care costs too high absent reform) we will never again have anything near a balanced budget.

The CBO long term budget outlook appears to be a Rorschach test in the it confirmed everything that everyone already believed. However, it is a much better story than that of the August, 2010 report, for example. And one of the best bits of news is the reduction in the cost of Medicare and Medicaid over the next decade. Basically, we have had at least one more year of slower than expected health care cost inflation below expectations that does not seem only linked the recession. Since this effects the base of any projections, that has improved the long run budget outlook; that is not projection, but observed reality. I remain nervous about assuming the rate of growth will remain lower, and still believe that long run budget stability will require more aggressive cost and cost effectiveness efforts in the out years. My recent experience navigating the health and long term care system for a Medicare beneficiary has actually lead me to believe that even beyond health care cost inflation, we need to reallocate Medicare spending away from wasteful, non productive expenditures and toward long term care, but that is another story.

So, where do we stand. CBO says current law will stabilize the debt to GDP ratio over the next decade at around 75% in 2023.

ScreenHunter_01 Feb. 06 08.35

The problem is that it begins to rise again in the next decade, mostly due to health care costs of the baby boomers impacting the federal budget via Medicare and Medicaid. What is too much debt is hard to answer, but as you can see, ~75% is higher than most of the post World War II period. What that means is that we have less room for deficit spending in another economic emergency(this assumes there is an amount of debt that is too much; I do, I just don’t know what it is). However, the period of the 1950s and 1960s saw greatly declining debt to GDP ratios in spite of consistent deficits because the economy grew rapidly (see fig . 1-1).

CBO released another report that looks at the expected impact of changes in the deficit over the next decade and economic growth, and the cover of the report is this figure.

ScreenHunter_04 Feb. 06 08.57

It demonstrates a tradeoff between short term and long term economic growth and deficit reduction. Increase the deficit by $2 Trillion over 10 years and growth in 2014 is higher, but growth in 2023 is lower. Decrease it by $2 Trillion over 10 years and growth in 2014 is lower, but higher in 2023. The Goldilocks principle (“its just right”) is quite elusive, and there is great economic pain and hardship in our country. Several points:

  • I think being on a path to 75% of GDP in a decade is ok, but that we need to develop a longer run path that is moving toward 50% of GDP. That means we need a health reform deal that will lay out a set of policies that we will actually try. My book is centered around this notion.
  • It will still take higher taxes. In my book I say we need to hit ~21% of GDP in receipts and the tax code we have now won’t do that. But, we don’t need to do this too fast. A tax reform that was designed with economic growth in mind would be a good next step. I also think the OASDI payroll tax cap needs to eventually be put back to the 90th percentile of wages, which is the essence of the 1983 Greenspan commission deal. Ideally, payroll taxes would be linked to economic growth and might be altered up or down based on economic growth.
  • Our domestic discretionary spending is set to be historically low. This is not the place to cut more. I do think we need more cuts in Defense spending, but it is not my expertise.
  • Further means testing of Medicare and Social Security seems to be an emerging consensus approach and I suspect a deal along these lines is obtainable. Eventually I think we will need to invigorate Medicare policy to undertake explicit cost effectiveness analysis of options, and formalize the principle that there will be some things we don’t pay for because they don’t work well. However, that is far off until we have a general deal around the ACA and what comes next. That is really the political stumble that blocks the next policy steps. I have suggested such deals.

So, I don’t think I am a deficit scold. However, I agree that there has been lots of energy and discussion of the topic, we have made some progress, but the last step to a truly long run sustainable budget is the next (and the next, and the next) steps on health reform.

About Don Taylor
Associate Professor of Public Policy at Duke University and author of Balancing the Budget is a Progressive Priority. On twitter @donaldhtaylorjr

3 Responses to Am I a deficit scold?

  1. Pingback: Bowles-Simpson 2.0 « freeforall

  2. Pingback: Quick budget note | freeforall

  3. Pingback: Reinhart/Rogoff and holy crap! | freeforall

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