The case for deficit optimism

January 20, 2013

Here’s a secret: For all the sound and fury, Washington’s actually making real progress on debt.


Olivier Douliery/ABACAUSA.com

Let’s do some quick math. Start the clock -- and the deficit projections -- on Jan. 1, 2011. Congress cut expected spending by $585 billion during the 2011 appropriations process. It cut another $860 billion as part of the resolution to the 2011 debt-ceiling standoff. And it added another $1 trillion in spending cuts as part of the sequester. Then it raised $600 billion in taxes in the fiscal cliff deal.

Together, that’s slightly more than $3 trillion in deficit reduction. After accounting for reduced interest payments -- as there’s now less debt to pay interest on -- it’s more like $3.6 trillion. That’s real money!

In fact, that’s about enough to stabilize the nation’s debt-to-GDP ratio over the next decade. If over the next few years, say, there’s another $800 billion in deficit reduction -- imagine a new deal that cuts $400 billion from Medicare and other mandatory spending while raising $400 billion in taxes -- then the country is put on a declining debt path.

But there’s bigger, better news than that. You might have heard about a recent spat in which House Speaker John Boehner told the Wall Street Journal that President Obama told him, “we don’t have a spending problem.” Cue the shock and horror from right!

In fact, what Obama said is that we have “a health-care problem,” not a spending problem. This is, in general, a fairly uncontroversial point on the right, at least when it’s not being made by Obama. Turns out, it’s also true.

Back in December 2011, I asked Rep. Paul Ryan, budget guru to the House Republicans, for his favorite chart of the year (yeah, I get down like that). He sent me one from the Bipartisan Policy Center showing four lines. One, labeled “discretionary spending,” was drifting down. Another, “mandatory spending,” was also falling. A third, denoting Social Security expenses, was rising a bit, but not by enough to worry anyone. The fourth, health-care spending, was shooting skyward. "Government spending drives the debt, and the growth of government health-care programs drives the spending,” Ryan explained.


Get health-care costs under control and you get the debt under control. (Bipartisan Policy Center)

So here’s the good news: The growth of health-care costs has slowed in recent years. Big time. From 2009 to 2011, which is the most recent data available, health-care costs have grown by less than four percentage points. That’s compared to typical growth of six or seven percentage points through most of the Aughts. And Medicare is following suit: Spending in 2012 grew by only 3.2 percent.

The $64,000 question -- actually, it’s worth trillions of dollars more -- is whether this slowdown is a recession-induced blip or the product, at least in part, of cost controls that will persist long after the economy has returned to health. At the moment, there’s evidence to support both views. And we have yet to really begin implementing the many cost control experiments in the Affordable Care Act. If we can get health-care costs under control, then our long-term budget picture is much better.

We can do more, and perhaps we should. Though the Affordable Care Act does much to bring Medicare to heel, there are policies left untried, including increasing deductibles and co-pays for wealthier seniors in Medicare. Similarly, taxes are going to have to go up by significantly more than they did in the fiscal cliff deal to support an aging population. One place to start is to limit the tax break richer Americans get on itemized deductions, as the Obama administration has proposed. Perhaps those two items can be the basis for a future fiscal deal.

But the truth is that deficit reduction is going better than you’d think from listening to the sniping in Washington. So why the continuous freaking out over the deficit? In part, it’s because deficits offer a convenient excuse for politicians to push policies that the American people wouldn’t support on their own terms. Republicans have long wanted to devolve Medicare to private insurers, for instance, but they didn’t get any traction with the idea until they cloaked it in the guise of deficit reduction.

In general, if someone says he thinks the deficit is the most important issue facing the country, but he doesn’t think it’s important enough to merit raising another dollar in taxes, he probably doesn’t really think the deficit is all that important an issue.

If you want to worry over the economy, don’t worry over future deficits, which we can and will get under control. Worry over the labor market, which is in worse shape than predicted a few years ago, and which exhibits fewer bright spots than the budget. The recession was deeper than expected, the recovery has been slower than predicted, and Washington has been feckless in its response than we would’ve hoped. Whereas in late-2011, the Obama administration was at least pushing a big jobs bill, now they and the Republicans have both fallen silent on the issue. At least the deficit has the two sides arguing and trying to act.

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