The fiscal crisis nears – or not
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