Economics for Grownups

We desperately need an honest national discussion about what the federal government should spend money on and who's going to foot the bill.
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The Republican Pledge to America has already been talked to death, alternately praised as a "new way forward" and damned as "a stack of bumper stickers". No surprise there: The pledge is a political document, less policy blueprint than talking points to deflect the wrath of Tea Party sympathizers away from the Republican establishment. But its content does offer an opportunity to reflect on how reluctant Republicans (and Democrats) are to confront the hard fiscal choices ahead. For whatever one thinks of the advisability of running mega-deficits during a deep recession (and as mainstream economists, we're cautiously in favor) it's hard to find anybody who argues that deficits-as-usual are desirable or even sustainable after the economy returns to full capacity.

Actually, if the starting point is current law =- that is, if Congress did nothing to change taxes or spending obligations -- the deficit would shrink to about 3 percent of GDP by mid-decade. Now, that would be nothing to brag about. Three percent deficits with the economy running full tilt would cut deeply into total home-grown savings available for investment, virtually guaranteeing that America would continue to run massive trade deficits (provided Asians cooperate by taking our IOUs). But by the rule of thumb that stabilizing total government debt as a percentage of GDP is good enough for government work, 3 percent seems almost manageable.

Oh, but there's a catch. Current law would allow all the Bush II tax cuts to expire and would permit the dread alternative minimum tax on personal income to take an ever increasing bite out of households that are middle-class by anybody's definition. Extending the tax cuts and caging the AMT, by contrast, would increase the deficit to 4.7 percent of GDP by mid-decade and 6.6 percent by 2020. President Obama's plan to raise taxes for $250,000-and-up households would trim the figure a bit, but would still leave Washington with a nasty 5.2 percent deficit in 2020. And in the decades thereafter, the budget would still become utterly unmanageable: Medicare and Social Security for the elderly and Medicaid (much of which is for the elderly in nursing homes) are poised to swallow Washington whole.

So what have the Republican pledged to do about it? Cut spending "with common sense exceptions for seniors, veterans and our troops." Alas, seniors, veterans and troops suck up a large and very rapidly growing share of the budget. Medicare, Medicaid, Social Security and interest on the federal debt (forget defense and everything else) will likely total one-fifth of GDP in 2035. For a point of reference, Rep. Paul Ryan, the GOP's star budget wonk, wants us to reduce total federal spending to just 24 percent of GDP in that year on its way down to 13 percent of GDP by 2083.

The point here is not to chastise either party for failure to talk turkey in an election year. But as the late Herb Stein (economic advisor to Presidents Nixon and Ford) so nicely put it, "If something cannot go on forever, it will stop." And if stopping is to be accomplished with a soft landing, Americans are going to have to answer a bunch of hard questions. Among them:

  • Are they prepared to accept sharp increases in the retirement age for Social Security benefits?
  • Are they willing to impose tough price controls on medical services -- or just give everybody who's old or poor a fixed sum to spend on care and let them figure it out?
  • Are they ready to let Washington abandon now-traditional responsibilities ranging from education to mass transit to medical R&D to housing and food subsidies?
  • Are they willing to accept the geopolitical consequences of a leaner military less able to project force abroad?

We desperately need an honest national discussion about what the federal government should spend money on and who's going to foot the bill. This isn't going to happen during the silly season leading up to November 2nd. But the clock is ticking and the likely consequences of procrastination are growing ever more grave.

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