The fiscal crisis nears – or not

March 12, 2013

Few economists preach spending cuts as a cure for high unemployment. Yet that’s exactly what Congress decided when it imposed, starting March 1, across-the-board spending cuts (the “sequester”). Despite Friday’s mildly upbeat jobs numbers, the economy remains limp, with 15 million or so unemployed individuals who want to work. Federal spending cuts won’t make their plight any better.

Congress has known for quite some time that the federal budget will turn sour in 10 to 15 years, with expected outlays far outstripping expected revenue. For complicated, if not odd, reasons, Congress now feels compelled to do what it ordinarily shuns: cut federal programs and raise taxes. That might seem politically brave and responsible. But brushed up against facts, the case for Congress taking swift action wobbles, hitting wrong targets at the wrong time.

Of the many reasons politicians offer for cutting federal spending during economically straitened times, two cry out for attention. First, many liberals and conservatives say, Congress needs to stanch soaring federal spending. Second, conservatives say, federal programs are growing ever more intrusive, ever more threatening to private initiative.

Those are the theories. What are the facts?

Fact No. 1: Federal spending relative to the size of the economy is not, Congressional Budget Office reports show, spiraling out of control once the temporary impact of economic recession is factored out of the calculation. Federal spending relative to the size of the economy is expected to hover between 20 percent and 25 percent over the next few years – setting off no alarm bells during the time that the economy is expected to struggle.

Fact No. 2: Federal debt has risen to about 75 percent of national income and is on course to hit 90 percent over the next decade. Is that alarming? Alan Auerbach, director of the Center for Tax Policy and Public Finance at the University of California, Berkeley, makes the hard-to-dispute point that economists have no hard evidence that the economy will operate significantly worse with a federal debt overhang of 90 percent rather than 75 percent.

What would be alarming, Auerbach makes clear, is federal debt that continues to grow faster than the underlying economy. At some point – though no economist knows what that point is – crisis erupts because Congress cannot, or will not, cut programs or boost taxes by enough to repay lenders. But the United States is nowhere near a debt crisis. Indeed, lenders are throwing money at the Treasury, demanding ridiculously little interest in return.

Fact No. 3: There is one exception to the country’s OK fiscal news: healthcare. The trilogy: Baby boomers are aging; medical expenditures rise with age; and medical expenditures per patient are rising at a fast clip in public and private sectors alike. Expect outlays on Medicare and Medicaid to soar. That won’t frighten anyone this year or next. But federal outlays on healthcare are expected to rise to 10 percent of national income from 5 percent over the next 20 years or so.

The underlying problem is that we’ve built a healthcare system that tells patients they deserve virtually any procedure that does some medical good – no matter how trivial the benefit and no matter how high the cost. The United States spends more than twice as much relative to national income on healthcare than do other wealthy industrialized countries. Congress needs to build a mechanism for saying no.

The upshot? There is a compelling need for Congress to solve the problem of soaring healthcare costs. If it does, then long-term fiscal balance will be in hand and federal debt levels will stabilize. Auerbach will rest easy. But if Congress dithers, then today’s preoccupation with billion-dollar sequesters will amount to trivial pursuits.

Fact No. 4: Government intrusion is hard to define, even harder to measure. Crude statistics, like the ratio of total federal spending to national income, do not capture what animates conservative opposition to government spending.

Consider Social Security. It’s huge and growing. But the program is growing slowly – to an expected 6 percent of national income in roughly 20 years from 5 percent today. Despite its size, however, Social Security is minimally intrusive. It doesn’t commandeer people and machinery to create a government-ordained product (like, say, a highway). Instead, it mostly uses computers to apply fixed formulas for the purpose of taking dollars from one set of pockets (current wage earners) and depositing them in another set of pockets (former wage earners). Critics of large government mislead when they bandy about statistics that lump Social Security with all other manner of federal spending.

By contrast to Social Security, consider discretionary programs – programs that require Congress’s annual review. They are the object of the current sequester. Discretionary spending includes money spent on border patrols, scientific research, public-health programs, courts, dam and highway construction, wars and a whole lot more. Here, government does intrude, steering people, machines and natural resources to government-chosen purposes. (I do not regard “intrude” as pejorative – the intrusion may be socially super.)

Liberals may take kindly to these discretionary outlays; conservatives may wish to take flight. Either way, the total bill for these “intrusive” discretionary programs amounts to a small and shrinking pittance. Non-military discretionary programs amount to only around 5 percent of national income – a small fraction of what they were as recently as the mid-1960s. Does this spending truly beg for substantial cuts?

So we face an oddball circumstance. Federal spending and debt pose no dire threat in the next few years when the economy is likely to remain fragile. Yet the picture will change a decade or more from now – when healthcare expenditures threaten to drive the federal budget deeply into the red.

What’s Congress’s response? It approves a sequester that makes cuts so immediate that they threaten to weaken an already weak economy. But they largely sidestep the sector where cuts are most needed – healthcare.

Give Congress credit. That’s impressively wrongheaded.


PHOTO (Top): House Speaker John Boehner speaks to the press after a bipartisan meeting with President Barack Obama to discuss the economy in the White House November 16, 2012. Also pictured are (L-R) House Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell. REUTERS/Larry Downing

PHOTO (Insert): Pills line the shelves in the pharmacy at Venice Family Clinic in Los Angeles April 16, 2007. REUTERS/Lucy Nicholson


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Happy days are here again..just tell the Treasury to keep printing..and everything will be all right…can you spare $100 for Starbucks..?

Posted by rikfre | Report as abusive

“We treat death as if it were optional. People talk about the right to die, as if we have the right to refuse to die. Once we stop treating death as an enemy and recognize it as an inevitability, we can save massive resources. We must look rationally at the phenomenal amount of resources we spend on the last few weeks of peoples’ lives to only prolong suffering. You can’t afford to do everything to everybody,” — Richard Lamm

Posted by COindependent | Report as abusive

You state “What are the facts?”

Fact No. 1: Federal spending relative to the size of the economy is not, Congressional Budget Office reports show, spiraling out of control once the temporary impact of economic recession is factored out of the calculation.”


Where, pray tell, did you learn finance and economics?

The statement that the US economy is not spiraling out of control “once the temporary impact of economic recession is factored out of the calculation” is inane to say the least.

That is equivalent to stating that a person who has a severe addiction to gambling, and is deeply indebted to the mob as a result, has no financial problems IF YOU IGNORE THE MASSIVE GAMBLING DEBTS.

Good luck with that “reasoning” when the mob enforcers arrive to break your kneecaps.

Posted by PseudoTurtle | Report as abusive

fact 3 – once you add healthcare as a right of every american then of course everyone shoud get everything they can. And once it is all covered by the govt then by golly I paid taxes once and I should get everything there is to offer, regardless of the cost. And if the doctor disagrees I will call my lawyer and I can get compensated for the untimely demise and pain and suffering. A jury just awarde 8 million dollars for a hip implant- coulf that patient ever have made that much money at their regular job?

Posted by zotdoc | Report as abusive

This article seems more correct than incorrect. However, there are some hard facts to consider. In order of ascending importance:

1. Market sentiment (about our debt) can reverse itself with alarming speed, and must be watched very carefully.

2. It’s easier to write about cutting healthcare costs than to cut them, because democracies aren’t good at difficult and painful choices, the demographics are against us, technology is expensive, and entrenched special interests fight major change.

3. If we don’t address the pathetic state of “average” education, we won’t have a rising standard of living.

4. If we don’t address the increasingly unequal distribution of wealth and life opportunities, we won’t have a democracy in 50 years.

5. Most importantly, by far, we must start experimenting with other approaches to democracy that place major decisions in the hands of attentive and informed groups of citizens, rather than professional politicians who must finance their re-election by an uninformed and inattentive electorate. This is THE problem facing all democracies, and it dates back to democracy in Athens. Most of us are afraid not to have some form of democracy, but our current approach to it is completely hopeless. We need some “American ingenuity” applied to that.

This article seems more correct than not, but like most sensible articles on this website, it amounts to spitting in the ocean, without addressing #5.

Posted by benfct | Report as abusive

@ COindependent —

Let me “flesh out” your bare bones comment from an extremist. Perhaps you should have been more candid as to why you included this particular comment from this particular individual.


In 1984, (Richard Lamm’s) outspoken statements in support of physician-assisted suicide generated some controversy, specifically over his use of the phrase “we have a duty to die.”

Lamm later explained that he “was essentially raising a general statement about the human condition, not beating up on the elderly,” and that the exact phrasing in the speech was “We’ve got a duty to die and get out of the way with all of our machines and artificial hearts and everything else like that and let the other society, our kids, build a reasonable life.” [9]

His dire predictions for the future of social security and health care (“duty to die”) earned him the nickname “Governor Gloom”.


This is a “slippery slope” indeed, since many others in the past have argued for the same policy of Social Darwinism — i.e. survival of the fittest, which is the underlying credo of the wealthy class, that others who are not wealthy should get out of their way by dying, all for the good of “our” (meaning ONLY those of the wealthy class are deemed “worthy”) children, of course — but what they want is exactly the same thing many authoritarian governments have experimented with in the past, mostly with horrific results.

“Examples are the Chinese “Great Leap Forward” and “Cultural Revolution” program and the Khmer Rouge’s plan of deurbanization of Cambodia.”

“Social theorists of the Frankfurt School in Weimar Germany like Theodor Adorno had also observed the new phenomenon of mass culture and commented on its new manipulative power, when the rise of the Nazis drove them out of the country around 1930 (many of them became connected with the Institute for Social Research in the United States).”

“The Nazis themselves were no strangers to the idea of influencing political attitudes and re-defining personal relationships. The Nazi propaganda machine under Joseph Goebbels was a synchronized, sophisticated and effective tool for creating public opinion.”


THIS is the logical result of what you (and most of the wealthy class in the US) are arguing for, but are not openly admitting with their attacks on the “entitlement” programs.

I think a better word for what you and the wealthy class want than “social engineering” is “genocide”.

You should be aware that there may be some significant unintended consequences should the wealthy class attempt to return to their former days of glory at our expense.

Posted by PseudoTurtle | Report as abusive

@ COindependent —

I assume my comments above are well-known in terms of China under Mao, as well as the policies under Hitler’s Germany, so that I need not elaborate.

But for those history-deficient people like you, here is the details of my reference to the Khmer Rouge:


The Khmer Rouge was the name given to the followers of the Communist Party of Kampuchea in Cambodia.

It was formed in 1968 as an offshoot of the Vietnam People’s Army from North Vietnam.

It was the ruling party in Cambodia from 1975 to 1979, led by Pol Pot, Nuon Chea, Ieng Sary, Son Sen, and Khieu Samphan.

Democratic Kampuchea was the name of the state as controlled by the government of the Khmer Rouge from 1975 to 1979.

This organization is remembered primarily for the genocide which was the result of its policy of social engineering.[1]

Its attempts at agricultural reform led to widespread famine, while its insistence on absolute self-sufficiency, even in the supply of medicine, led to the deaths of thousands from treatable diseases such as malaria.

Arbitrary executions and torture carried out by its cadres against perceived subversive elements, or during purges of its own ranks between 1975 and 1978, are considered to have constituted genocide.[2]


The question is rather straightforward for anyone who understands what is really going on in this country:

Do we want to allow the US wealthy class to practice genocide as a means of becoming even richer than they are now, or do the rest of the American people have just as much of a right to life as they do?

As questions in life go, that is about as simple as they come — be careful how you answer it!

Posted by PseudoTurtle | Report as abusive

“But the United States is nowhere near a debt crisis. Indeed, lenders are throwing money at the Treasury, demanding ridiculously little interest in return.”
It seems the Fed is doing most of the throwing of money our way – and thus keeps rates cheap – until suddenly that process reverses.

Posted by keebo | Report as abusive

“But the United States is nowhere near a debt crisis. Indeed, lenders are throwing money at the Treasury, demanding ridiculously little interest in return.”
It seems the Fed is doing most of the throwing of money our way – and thus keeps rates cheap – until suddenly that process reverses.

Posted by keebo | Report as abusive