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.
© 2013 Demos
Robert Kuttner is co-founder and co-editor of
The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank
Demos.
He was a longtime columnist for Business Week, and continues to write
columns in the Boston Globe and Huffington Post. He is the author of
A Presidency in Peril: The Inside Story of Obama's Promise, Wall Street's Power, and the Struggle to Control our Economic Future,
Obama's Challenge, and other books.
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