The New York Times
By: David Leonhardt
June 21, 2011
Republicans say they won't raise taxes. Democrats are reluctant to cut Social Security, Medicare and Medicaid. So discretionary spending -- the roughly 35 percent of government that includes other social programs and the military -- will have to be a big part of any deal in coming weeks to raise the debt ceiling.
But there is a little problem with discretionary spending.
According to the government's official forecasts, discretionary spending is already slated to shrink significantly. Military spending will fall by 25 percent, as a share of the economy, over the next decade. Domestic programs will shrink even more, and by 2021 they will account for their smallest share of the economy since the 1950s.
I'm guessing you haven't heard of these plans, however. That's probably because plans is a bit of an exaggeration. Assumptions is a better word: per Congress's orders, the baseline budget numbers unrealistically assume that future discretionary spending will grow only with inflation, rather than with population growth and economic growth, too.
As a result, Vice President Joe Biden, Republican leaders and the other deficit negotiators not only have to cut discretionary spending to make progress. They have to cut it even more than the Congressional Budget Office, the keeper of the official numbers, already assumes that spending will be cut.
And the scale of the cuts could do real damage. They could jeopardize food safety, highway quality and F.B.I. investigations. They could hurt the poor at a time when unemployment remains near a three-decade high. They could undermine education and scientific research, the best hopes for future prosperity.
The goal of deficit reduction can't simply be arithmetic. It has to be philosophical, as well. In what ways is the private sector incapable of planting the seeds of future economic growth -- and what, therefore, must the government do? What's the least amount of spending needed to ensure a decent life for even the most vulnerable citizens? Who is in the best position to pay that money?
By many accounts, the debt ceiling negotiators, starting with Mr. Biden and Eric Cantor, the second-ranking House Republican, have made progress. They could potentially get to their goal -- $200 billion in average annual deficit reduction over the next decade -- with a combination of discretionary cuts and tweaks to Medicaid, Medicare and maybe Social Security. President Obama's intention to withdraw troops from Afghanistan will help.
But even if the negotiators reach their short-term goal, they won't be close to getting the deficit under control. That would require closer to $500 billion in annual deficit cuts over the next decade.
Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world's highest health costs (by far), the world's largest military (by far), a Social Security program built when most people died by 70 -- and to pay for it all, the lowest tax rates in decades.
To put it in budgetary terms, the deficit we imagine comes largely from discretionary spending. The one we have comes partly from discretionary spending but mostly from everything else: tax rates, Medicare, Medicaid and Social Security.
Taxes may be the toughest issue politically, but the mechanics of raising taxes are not all that difficult. As the 1990s demonstrated, the economy can grow rapidly even after a modest tax increase. As the last decade showed, a big tax cut doesn't necessarily prevent mediocre growth.
Bruce Bartlett, a former Treasury Department official, has pointed out on The New York Times's Economix blog that average federal tax rates are "lower for most taxpayers than they have been since the 1960s." The government could raise about $60 billion a year by letting the high-end Bush tax cuts lapse and tens of billions more by reducing tax breaks for companies and individuals.
On Social Security and Medicare, Washington could start by reducing benefits for the affluent -- that is, the people who have received the biggest pay raises and tax cuts in recent years and whose life expectancy has risen the most. When conservatives like Mitch Daniels, Glenn Hubbard and Greg Mankiw talk about means-testing benefits, they're talking about exactly this: making the programs more progressive.
Beyond means testing, the most promising strategy on health costs is probably a combination of conservative and liberal ideas.
Medicare could get more serious about refusing to pay for health care that doesn't make people healthier, as the Obama administration has urged. The program could also introduce more incentives for people to choose cost-effective care, as Republicans prefer. Medicare's problems are large enough that every plausible idea deserves a chance.
Discretionary spending, as more than one-third of the federal government, obviously must be part of the solution. In particular, bipartisan budget groups have called for annual military cuts of about $100 billion, or about one-seventh of the total budget, which would begin to reverse the post-9/11 spending bulge. Social programs -- which often fail to achieve their fundamental goals -- could also stand some rigorous scrutiny.
But the problem with the current debate is just how much of the budgetary burden falls on a relatively small part of the government. It isn't just any part of the government, either. It is the part that has the best record of turning today's spending into tomorrow's economic growth.
Tax cuts don't deliver nearly the economic oomph that their advocates claim. Medicaid, Medicare and Social Security, central to a decent society as they may be, certainly don't do much to plant the seeds of future prosperity. Discretionary spending really can.
Discretionary spending let the Defense Department build the Internet. It let the National Institutes of Health finance life-saving research. It has helped make possible the semiconductor, the broadband network, the highway system and airports.
If we're smart, we won't just avoid damaging cuts. We will even find a way to increase forms of discretionary spending. As history has shown, economic growth remains the best deficit-reduction strategy of all.
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