Bankrupt! No, not the U.S. economy, just the policy discussion about it

This Week with George Stephanopolous  yesterday was dominated by a panel discussing the deeply silly question of, “Is the U.S. going bankrupt?”

It’s a silly question for one because it conflates issues with the federal budget deficit (which the show was entirely about) with the U.S. economy writ large. I know this is news to far too many pundits but the budget deficit and the U.S. economy are not the same thing. And if you look at the broader perspective of the U.S. economy, it’s clear that it’s not “going broke.” On average, the U.S. economy over any long period of time has been (and will be, absent some catastrophe) growing acceptably fast. Unfortunately, very few American households have actually experienced this “average” growth, since incomes at the very top have grown extraordinarily rapidly and absorbed vastly disproportionate shares of income growth in recent decades. So, if This Week  wants to devote a very serious show obsessing about the dangers of growing inequality, then I’ll be happy to give them a round of applause for devoting time to an actual, identifiable economic problem.

And even in its own poorly-defined terms (i.e., the outlook for the federal budget deficit), the show was mostly a bust.

For one, nobody reminded the panel or its viewers that the large increase in budget deficits in recent years have been driven entirely by the Great Recession (and its aftermath) and the explicitly temporary policy responses passed in its wake. This is important to know. In 2006 and 2007—even after the Bush tax cuts, wars fought with no dedicated funding and the passage of a deeply-inefficient Medicare drug program that also had no funding source—budget deficits averaged around 1.5 percent of total GDP, levels that no economist would argue are evidence of a crisis. After the Great Recession and the temporary policy responses passed in its wake, these deficits swelled to closer to 10 percent of gross domestic product—levels that people commonly refer to as “scary.” They are “scary” numbers, but only because they’re indicative of the depth of the economic crisis we’ve been through. Rep. Chris Van Hollen (D-Md.) made the useful point that job one in economic policy—particularly in regards to fiscal policy—should be to solve the joblessness crisis. And when the economy is healthy again, the vast majority of the increases in budget deficits seen in recent years will fade away.

Lastly, although Medicare discussions permeated the panel, the key point about Medicare and other federal health spending was lost: It is the failure of our private health sector to constrain per beneficiary costs that is the entire cause of projected long-run budget deficits. If health spending rose as fast as the overall economy, long-run budgets would show surpluses as far as the eye could see.

Too often (still, after literally decades of well-informed analysts correcting them) pundits and even many policymakers define the problem driving projected long-run deficits as “entitlements,” by which they mean Social Security, Medicare and Medicaid, and they frame this problem as one driven inevitably as a problem of demographics—as Americans age, the programs that provide them income and health security will grow.

But the demography problem just isn’t there. There is a one-time boost to levels of spending on the retirement security programs stemming from the Baby Boomers’ retirement—but this one-time boost is modest and does not grow. The extra spending we’d need to afford it is less than the increase in defense spending we undertook between 2001 and 2005. Regardless of what you think of the outcome of this increase in defense spending, nobody has argued that it has (or will) bankrupted the country.

Instead, the entirety of the “entitlements” problem is the rise in spending on the health programs, and the entirety of this rise is driven by per beneficiary health costs far exceeding the growth of the overall economy.

I feel like we used to all know this—Peter Orszag’s signature achievement as Congressional Budget Office director was to publicize this clear fact—perhaps most famously in these graphs that accompanied the CBO long-run budget outlooks during his tenure.

Since then, the central role of health costs in driving long-run deficits has been forgotten. As a result, we have a much less useful fiscal policy debate. This is a shame, and maybe it’s time for CBO to start publishing this graph again.


  • benleet

    I first saw that graph in Jeff Madrick’s report Citizens’ Commission on Jobs, Deficit and the Economy. His conclusion was,
    “At the end of World War II, the U.S. was burdened with debt that totaled over 120 percent of GDP. But we made the investments vital to a new economy—the GI Bill, housing subsidies, the Interstate Highway System, the conversion of military plants, and the Marshall plan. We did not adopt austerity economics. We ran modest annual deficits over most of the next two-and- a-half decades and the debt grew in absolute size, but the economy and the broad middle class grew faster. By 1970, the debt had been reduced to 35 percent of GDP. The better way to reduce the deficit as a percent of GDP is to increase GDP.

    Taking the high road to fiscal balance

    We believe there are three essential guidelines for America’s future budget policy.

    The right way—in fact, the only way—to guarantee the nation’s fiscal sustainability, in the short run and the long run, is by creating jobs, not destroying jobs. The most fiscally responsible path requires substantial fiscal stimulus now. A new round of spending cuts will be self-defeating.