How Will Congress Pay for Policy Changes?

• In the short term, we don't have a deficit problem: as long as unemployment remains highly elevated--certainly as long as the unemployment rate stays above 7%--and as long as interest rates on U.S. Treasuries stay low a bigger federal deficit is a feature not a bug: our short-term deficit problem (and the short term lasts for most of Obama's remaining term) is that the deficit is too small, not too big.

• In the long term, our deficit problem is a federal government health spending problem. Unless medical care cost growth is brought under control--and here the drivers are not factors specific to government programs, for private-sector medical expenditures are exploding at least as rapidly as Medicare and Medicaid--then excess medical cost growth will lead the federal government health programs to first devour the rest of the social insurance state in the years after 2020 and then devour themselves.

• In the medium term between 2012 and 2020 we are, current projections tell us, on a sustainable budget path--with a budget deficit "no larger than the average of the past thirty years," as the Bush administration flacks used to tell us--with a stable debt-to-GDP ratio as long as output does not grow more slowly than projected and as long as congress observes PAYGO: as long as congress pays for whatever policy changes it makes.

Doug Elmendorf's worry--the thing that makes him pay attention not to the solid medium-term sustainable-deficit lines in the graph above but to the dotted medium-term unsustainable-deficit lines in the graph above--is that Congress will not pay for the policy changes it enacts.

So now let's turn the microphone over to Matthew Yglesias:

The Surprisingly Easy Medium-Term Budget Fix: The dashed lines, however, represent a “current policy” scenario in which we assume that some of the Bush tax cuts will be extended and also that the AMT threshold will continue to be pushed up. Those are reasonable assumptions.... Elmendorf, in other words, isn’t wrong to worry about that.

But... this nuance is lost on the man in the street. The problem... isn’t... that we’re driving toward the edge of the cliff. The problem is... congress seems overwhelmingly likely to steer us [over the cliff].... It’s absurd for [congressional] politicians to be... engaged in highly public deficit hand-wringing...

while not admitting that they could solve the problem by simply saying no.

Senator Evan Bayh and others sound a lot like they are saying: "The President needs to do something to keep us from voting the way we have decided to vote!!"

That's just sad.

Just say "PAYGO," starting in fiscal 2012. That's all that it will (probably) take for the medium term...

Comments

[socrateaz:]

I really think the end of the world scenario of the Mayan calendar may correspond closely with a realization worldwide government expenditures are on a course to destroy the economy as we currently think of it! I think a serious reset might become necessary about that time! I do not mean tweaking things. I mean a serious change in the monetary system and policies which could mean near total destruction of accumulated wealth. Making all starting from scratch. I have no doubt most wealth will end up in a few hands very quickly. And the distribution of wealth will again be extreme. But the wealth will end up in the hands of the producers and not so much in the hands of the wealth redistributers. I believe in social redistribution but not to the degree or by using the methods pushed by most Socialists. I think fairness has to do with ones effort and reality. A social net for those who will not produce should be rewarded with a minimal healthcare and support level. If it costs society, and society gets little benefit then those people should have a lower level fo help than those who contribute. The current course really rewards doing nothing. That will not work forever.

Nov 15 05:07 AM

[Kimball Corson:]

When someone tells me the deficit, while positive for a period, is actually low, somehow I can't help thinking they believe there is a good way to increase it.

If health care doesn't financially strangle us first, we have got to learn how to effectively reduce and control health care costs. Too many in the field are making out like bandits. Hospitals run like doctors' coops. Between doctors' and nurses' salaries and drug costs, we are getting hammered in ways we shouldn't be. The whole surrounding institutional structure is geared to defend the status quo, which stinks. Either we are going to bust it or it is going to bust us.

The Health Care bill, if passed, will frame the eventual fight. The lobbying will be so intense, we should sell tickets to allow access to those in Congress. Take a number. Perhaps that will take care of the financial problem. There may be no need to vote; just continually threaten to have one.

Nov 16 01:19 AM