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Third Way Needs To Get Real, Stop Swinging Its Social Security-Medicare Ax

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The Social Security and Medicare cutters are very unhappy. Who can blame them? The vast majority of people across the political spectrum oppose their plans to cut these programs. Furthermore, improved budget projections (partly because of cuts that are very bad news) have drastically reduced both current deficit projections and projections for longer term deficits. Finally, one of their main props for the urgency of deficit reduction turned out to be  nothing more than a Harvard Excel spreadsheet error.

No, things have not gone well for those wishing to ax Social Security and Medicare, but they are not about to give up. And with the money and access to the media they enjoy, why should they?

Hence we have Jon Cowan and Jim Kessler from Third Way giving The Washington Post's house view in a column headlined, "The left needs to get real on Medicare, Social Security and the deficit." The proximate cause for Cowan and Kessler's ire is a column by Neera Tanden and Michael Linden from the Center for American Progress which argued that we should focus on fixing the economy's current problems by improving infrastructure and creating jobs.

To their great credit, Tanden and Linden reversed their earlier concern with deficit reduction based on the evidence. The deficit has shrunk by more than had been projected and the downturn has been longer and deeper than they had expected. Faced with new facts, Tanden and Linden proposed different policies. This makes deficit dead-enders like Cowan and Kessler very unhappy.

Let's see what they have to say.

Actually their main trick is pretty simple and right up front. They use the old "whack them with a really big number" trick. Cowan and Kessler tell us that in 2030 we are projected to have a deficit of $1.6 trillion. Got that, $1.6 TRILLION!!!! Yeah, that is lots of money and we're supposed to be really really scared.

Anyone know how big the economy will be in 2030? The Congressional Budget Office (CBO) projects that it will be just about $46 trillion. This means that this very scary $1.6 trillion projected deficit will be slightly less than 4.6 percent of GDP.

Is this too big? It is probably larger than the deficit that we will want to be running 17 years from now, but it is not exactly a disastrous deficit. We ran deficits that were larger in every year from 1983 to 1986. We were also higher at 4.7 percent of GDP in 1992. Those deficits did not wreck the economy, even if they were arguably larger than would be desired.

But the key point is that the bad story that Cowan and Kessler are hanging over our heads is not exactly a disaster, it is sort of like telling us that we might get the flu 17 years from now. No one wants to get the flu, but we are probably not going to ignore all the problems we face now (and those are huge) because we might get the flu in 17 years. If we had thought this way back in the 1960s we wouldn't have established Medicare and Medicaid because of the deficits we might see just 17 years after these programs were put into place.

But Cowan and Kessler don't want us to address current problems -- like children growing up in poverty, with parents who may never get a job again -- they want us to cut Medicare and Social Security. They tell us that even if we restore pre-Reagan type taxes on the rich we would still have a deficit of $1.3 trillion in 2030. (I'd actually place a higher priority of getting much of this revenue from a Wall Street sales tax that nails financial speculation, like the one in the U.K., but we'll take what we can get.)

Yes, $1.3 trillion is still a really big number, but it comes to just 3.7 percent of GDP. That's a deficit that we could run pretty much forever. The deficit was larger than this in all but three of the years between 1982 to 1993. Again, smaller deficits might be better, but a deficit of 3.7 percent of GDP is certainly not a disaster.

And, the fact is we are not actually making the budget for 2030. We are going to be electing new Congresses every two years between now and 2030 and we have four presidential elections between now and then. Even if we got Congress and the President to agree today to adopt the Cowan-Kessler agenda in its entirety, the nasty voters may put in people who change course over the next 17 years. That's the problem with democracy; people get to make choices.

Let's get back to Cowan and Kessler:

"In the mid-1960s, the federal government spent $3 on public investments for every $1 on the major entitlement programs. By the early 1970s, the ratio was one to one. Last year, it flipped. The federal government spent $3 on Social Security, Medicare and Medicaid for every $1 on federal investments, according to our analysis of data from the Office of Management and Budget. By 2022, the ratio will be one to five. In other words, entitlement programs are drowning out public investments just as international competition and technology demand that we need these investments the most."

Yes, we didn't have Medicare in the mid-1960s and we still had relatively few retirees. Of course these programs now cost more than they did then. And we are taxing ourselves to pay for them. The Social Security tax has been roughly doubled over this period and Medicare tax went from 0 to 2.95 percent of payroll. And contrary to Cowan and Kessler's analysis of the politics, very few members of Congress have lost their jobs because of these tax increases. The public has been willing to pay for these programs and according to  polling research done by the National Academy of Social Insurance, they would be willing to pay more if necessary. As a factual matter, the impact of these taxes on the living standards of the middle class has been trivial compared to the policies that have led to the enormous upward redistribution of before-tax income over this period.

Since these programs are financed primarily through dedicated taxes, one would be hard-pressed to make the case that they are responsible for the decline in infrastructure spending. We are collecting a much smaller share of GDP in corporate income taxes and excise taxes (largely tariffs) than we did in the 1960s. It would be difficult to argue that these tax reductions were directly related to the rise in Social Security and Medicare taxes.

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
 

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The naysayers, re cutting entitlements will m... by James Tennier on Sunday, Jun 30, 2013 at 3:50:51 PM
Conservative assumptions imply that Social Securit... by Darren Wolfe on Monday, Jul 1, 2013 at 6:02:43 AM