By Henry J. Aaron
The degree to which words can distort our view of reality is remarkable and ominous. For some time, debate on public policy has been debased and misdirected by terms that bear little relation to reality. Exhibit 1 in this indictment is the term "entitlement crisis"; exhibit 2 is "fiscal cliff.""Entitlement crisis" conjures up an "oh God, we have to do something" mentality that is appropriate to emergencies. In fact, the challenges of paying for Social Security and Medicare unfold slowly. In the case of health care, we are well on our way to solving them. The term, fiscal cliff, focused public attention on a non-event, the various legislative provisions expiring on January 1, 2013. But it obscured what threatens to become an economic and constitutional crisis of historical proportions, the potentially catastrophic deadlock over the debt ceiling.
The simple fact is that there is no "entitlement crisis." "How can you say that?" you ask. Everyone talks about it. Are they deluded?” The answer is “yes, if one is focusing on Social Security and Medicare, they are deluded.”
Here are the facts. Social Security is expected to run a surplus, not a deficit, in 2013 of $41 billion. As the baby-boomers retire, spending will grow faster than revenues, but 2021 will be the first year in which total outlays are projected to exceed total income. In 2012, Social Security will have reserves estimated to be over $3 trillion. To be sure, deficits will increase thereafter, and eventually those reserves will be exhausted. So, revenues must be increased, benefits cut, or both. A problem? Yes, definitely. But hardly a crisis.
The situation with Medicare is more complicated, but not critical. The Medicare Hospital Insurance trust fund is going to run a deficit of about $18 billion in 2013— less than 2 percent of the overall federal deficit. No crisis there. But, you may say, spending on the retiring baby-boomers will cause Medicare’s spending to explode...right? Well, not at first. This Medicare deficit is expected to shrink for several years and to return to today’s level only in 2021. The reason costs are well contained may surprise you. The reason is that the Affordable Care Act (aka Obama Care) significantly slowed the increase in Medicare spending. In fact, growth of per person spending under Medicare has been a bit slower, and is projected to be considerably slower, than growth of per person spending in the rest of the health care system.
Indisputably, the United States spends more on health care than does any other nation. Our system is replete with inefficiency and waste—and that is a problem. But it is a systemic problem, not one confined to Medicare. Health reform is intended, among other things, to begin to deal with that problem by changing the way we organize and pay for health care. A health system problem? Yes. A health "entitlement crisis"? No.
What the Fiscal Cliff Was Hiding
As the New Year approached, no sentient being could escape febrile maundering from talking heads, newspaper pundits, and internet bloggers warning of the "fiscal cliff"—the collection of legislative events timed to occur on January 1st. There was a sizeable kernel of truth in these concerns. If all were allowed to take effect and continue for a few months, there is little doubt that they could have seriously damaged the economic recovery.
But with one major exception—the abrupt end on December 31, 2012 of extended unemployment benefits for about 2 million long-term unemployed—none of these events would have done great immediate damage. Rather their effects would have cumulated with time. In short, there was a need for action but there was nothing particularly special about January 1st.
Despite this fact, many acted as if the fate of the republic would be jeopardized if New Years day passed without a decision on what to do about the various expiring tax rules and the impending cut in payments to physicians under Medicare.
In the madcap rush to get legislation enacted and signed, two very bad things happened. But virtually no one noticed. The first bad thing that happened was that the president and Congressional Democrats and Republicans settled on a bill that exacerbated the very long-term deficit problem that both agreed poses a serious long-term economic threat to the nation.
When Congress passed The American Taxpayer Relief Act and the president signed it, they increased the budget deficit over the next decade by $4 trillion. If they had done nothing, if they had continued to be just as deadlocked and ineffective as they had been for most of 2012, the deficit would eventually have begun to grow less rapidly than national income. The long-term budget deficit problem would have been largely solved.
Such a course was not acceptable, of course, because the tax increases and spending cuts set to take effect in on January 1, 2013 would have turned economic recovery into renewed recession. But if the recovery needed support, then the proper course would have been to continue, or even increase, economic stimulus in 2013 while boosting tax rates and cutting spending growth once economic recovery was underway.
Instead, Congress took no action to spur economic recovery in the near term. And it increased the long-term budget deficits that virtually everyone properly fears will generate an unsustainable increase in the national debt.
About That Debt Ceiling
Not only did the American Taxpayer Relief Act create the very problem its authors said they wanted to solve, but it diverted attention from a looming crisis of vastly greater proportions. The U.S. government has reached the legislated limit on borrowing, the national debt ceiling. The mere existence of such a ceiling is a mathematical absurdity. Having voted for expenditures and tax laws, the Congress cannot logically also put a limit on the difference between those two sums.
Most past debates on the debt ceiling have been little more than an opportunity for bloviation—pious statements about the virtues of frugality but little more. In 2011, however, Congressional Republicans announced a new principle, christened the Boehner rule. According to the Boehner rule, the debt ceiling should be increased only if projected spending over the next decade is cut by the same amount. Advocates of the Boehner rule are now also saying that taxes are off the table because not all of the Bush tax cuts made permanent.
To see what the Boehner rule means, consider the following facts. Based on projections done last August by the Congressional Budget Office, the national debt will increase over the next decade by about $12 trillion under current law. To cut spending over the next decade by $12 trillion, it would be necessary to cut annual spending by an average of $1.2 trillion a year. Since total non-interest spending over that period will average $4 trillion a year under current law, about 30 percent of projected spending would have to be eliminated. Because big cuts are impossible next year or the year after, the required cuts toward the end of the decade would have to approach 50 percent to satisfy the Boehner rule. As it happens, no one in either party—and, most tellingly, none of those insisting on the dollar-of-cuts-for-a-dollar-of-increase-in-the-debt-ceiling trade-off—has indicated where spending cuts of even one half this amount should come from. Even so, they have declared that they will oppose any increase in the debt ceiling unless these terms are met. And they have the votes to make their commitment hold.
People within the Administration have referred to these demands as economic terrorism, which in my view is entirely fair and accurate. They have said flatly: "We don’t negotiate with terrorists.”
It's About to Get Ugly
The official debt ceiling has been reached. Now, the Treasury Department is using so-called "extraordinary financial means" to pay bills. The moment of reckoning will come when the limit of such extraordinary means is reached, probably late in February. What happens then is anyone’s guess. The only benign outcome would be for those who have propounded the Boehner rule to abandon it as unreasonable and face up to the fact that if they want spending cuts, they will have to name them and win enough votes to make them the law of the land.
Otherwise, the results will not be pretty. The president may cave and agree to cuts that would eviscerate public services. A deadlock may continue causing the nation to default on its debt or fail to pay at least some of its bills, including Social Security benefits, salaries of federal employees, bills from doctors and hospitals under Medicare, and veterans benefits. The president might invoke a controversial provision of the 14th amendment that some Constitutional scholars think authorizes him to borrow as needed in order to maintain "the validity of the public debt." Alternatively, he might rely on a financial gimmick to ignore the borrowing limit. Whether he invokes the 14th amendment or uses a financial gimmick, the possibility of impeachment or other political crisis would ensue.
In brief, "fiscal cliff" was a metaphor so vivid that it made people believe an event was momentous when it really wasn’t. Now the nation faces a genuinely critical event. It is not arousing appropriate concern and outrage, however, because no one has found a metaphor to make a real crisis seem real.
Henry J. Aaron is the Bruce and Virginia MacLaury Senior Fellow at the Brookings Institution.
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