The case against a “grand bargain”

A deal that cuts entitlements would be bad for mainstream Americans. And besides, what's the rush?

Topics: "grand bargain", budget deficit, national debt, Medicare, Fiscal cliff, Medicaid, Social Security, social safety net,

The case against a "grand bargain" (Credit: AP/Carolyn Kaster)

According to news reports, President Obama wants a “grand bargain” with the Republicans, who retain a majority in the House of Representatives even though in this year’s election more Americans voted for Democrats than for Republicans for Congress. The details of various “bipartisan” grand bargains vary, but most proposals, like the one proposed by the right-wing Republican Alan Simpson and the conservative Southern Democrat Erskine Bowles, the heads of the president’s failed deficit reduction commission, would trade modest Republican concessions on higher taxes on the rich for Democratic support for major cuts in Social Security, Medicare and other entitlements.

Any such grand bargain would be a bad deal for mainstream Americans.

Social Security and Medicare have absolutely nothing to do with the short-term U.S. fiscal problem. Middle-class entitlements do have long-term problems, like inadequate payroll tax revenue for Social Security in the 2030s, and excessive medical prices in the U.S., which affect private healthcare as well as Medicare and Medicaid. But these are unrelated problems that deserve to be discussed in unrelated debates according to unrelated timelines.

Here is a chart from the Center on Budget and Policy Priorities, which details the sources of our current public debt:

As the chart shows, nearly half of the U.S. public debt explosion is the result of George W. Bush’s tax cuts, which chiefly benefited rich Americans, and George W. Bush’s wars in Iraq and Afghanistan, which were funded entirely by borrowing rather than taxes. The rest of the debt increase is the result of lost revenue from the Great Recession, with a small additional sum from federal government emergency responses to the Great Recession, such as the bailouts of the banks, Fannie Mae and Freddie Mac, the stimulus, and automatic stabilizers like the federal contribution to unemployment insurance. Note what is missing from the chart. The ballooning of the public debt was not caused in any way by any explosion of spending on Social Security, Medicare, Medicaid or other middle-class entitlements or safety-net programs for the poor. And yet the proponents of a “Grand Bargain” like Simpson and Bowles tells us that we need to move quickly to cut these essential social insurance programs, which — it bears repeating — had nothing at all to do with the present fiscal crisis. Let’s see just how ominous the long-term problems of Medicare, Medicaid and Social Security are, with three charts via Ezra Klein at the Washington Post:

Does this look like an urgent entitlement spending crisis to you?

Note that Social Security spending is more or less flat until past 2035, rising from a little below 5 percent of GDP to around 6 percent of GDP. We need a long, unhurried, thoughtful national debate to consider all of the options for dealing with this relatively minor shortfall in funding. The national debate should include ideas like adding non-payroll taxes to the Social Security revenue stream and raising, not cutting, Social Security benefits, which proved to be far more stable than tax-favored private savings accounts like IRAs and 401K s during the two stock market crashes of the previous decade.

But what’s the rush? Why do we need to deal with Social Security in a hurry in the next few weeks of the lame-duck session, or 2013? Why can’t reform of Social Security wait until later in this decade, or the 2020s?

The share of GDP dedicated to Medicare and Medicaid is rising more rapidly than that of Social Security — but not as fast as the deficit doomsayers would like. For that reason, the Chicken Littles of fiscal conservatism often prefer scary charts that extend all the way to the 2080s, purporting to show that these programs, absent changes, will swallow much more than the hardly apocalyptic 10 percent of GDP they consume by 2040 in the chart above. But even the chart reproduced here may exaggerate the long-term problem, because the rate of health cost growth in the U.S. has moderated in recent years.

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In reality, the most important long-term challenge is reducing excessive American health industry prices, without reducing access to healthcare by ordinary Americans. If the prices and fees of doctors, drugs and hospitals in the U.S. were comparable to those in most other advanced industrial countries, we could have more healthcare at lower cost and the entire discussion about the federal budget would be radically different. Sure, there will ultimately be some sort of upper budgetary limits on public spending on healthcare in the U.S. and in all advanced industrial democracies — but let’s get prices down in America first, by medical industry price and delivery reform, and worry about caps on public healthcare spending later.

Here’s the test of true “deficit hawks”: Do they favor the adoption in the U.S. of “all-payer regulation,” the tried-and-true medical price containment system that keeps medical prices under control in almost every other OECD country? If they are more concerned with rationing access to healthcare than reducing the excessive prices charged by monopolistic and oligopolistic U.S. medical providers, self-proclaimed deficit hawks are frauds.

Last chart of the day. During last summer’s negotiations over the debt ceiling with the radical right-wingers in the House of Representatives, President Obama was reportedly willing to consider not only increases in the age of Medicare eligibility but also proposals for stealth cuts in the form of “chained CPI (consumer price index)” for Social Security — which, let us recall, contributed absolutely nothing to America’s present fiscal situation.

What is chained CPI? It is a different way of calculating inflation adjustments for Social Security, which would allow inflation to reduce their real value over time, while fooling America’s elderly into thinking that they were receiving what they had been promised.

How bad would chained CPI be? The longer you live, the greater the compounded effect of this devious, hidden benefit cut. Imagine any member of Congress or presidential candidate proposing to cut Social Security benefits — but only on the condition that the benefit cuts for 90-year-olds be much greater than those for 70-year-olds. Outrageous? And yet this is reportedly what President Obama and some centrist Democrats as well as many conservative Republicans are thinking about doing, in a sneaky, secretive, dead-of-the-night “grand bargain” that would be rammed through Congress without adequate debate. Take a look at this 2011 chart, from the National Women’s Law Center:

Is this really what Barack Obama wants as part of his legacy as president of the United States? Cutting Social Security for future 95-year-olds by 9.2 percent?

We don’t need a bad grand bargain. In fact, we don’t need a grand bargain of any kind.

In this lame duck session, Congress should agree on short-term deals to avert the sequester and to deal with the expirations of the Bush tax cuts and payroll tax cut and a few other minor patches — and nothing else. Long-term tax reform, Social Security reform, medical industry price and delivery system reform — these are jobs for future Congresses. Leave future legislators something to do.

There’s no hurry. We have plenty of time.

Michael Lind is the author of Land of Promise: An Economic History of the United States and co-founder of the New America Foundation.

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