October 30, 2014

Politically Popular Options Aren’t Enough for Serious Deficit Reduction

My least favorite argument in deficit reduction debates is that a particular option can’t be chosen because it is too unpopular. If that criterion is strictly applied, we might as well fold our tents and wait for the inevitable fiscal crisis because we’ll never eliminate trillion-dollar deficits with “popular” options.

That message was clearly conveyed last week by the Bipartisan Policy Center’s Debt Reduction Task Force, led by two veterans of past deficit-reduction efforts, Pete Domenici and Alice Rivlin. Their report followed a similarly tough message from Erskine Bowles and Alan Simpson, co-chairs of the President’s bipartisan fiscal commission.

Elected officials have not flocked to embrace these reports and it is easy to see why. They propose spending cuts in popular programs. They challenge cherished tax breaks and raise revenues in the process. They produce howls of protest from powerful interest groups on the political left and right.

But they each do one more thing: They outline plausible paths to a sustainable fiscal policy.

As a member of the Bipartisan Policy Center’s task force, I’m very proud of the resulting report. We worked together in a spirit of cooperation and compromise. However, I also have great respect for the Bowles-Simpson framework.

What is critically important about both proposals is that neither of them pretends that there is a magic solution that will preserve everyone’s favorite programs and simultaneously cut taxes. While differing in details, the two reports reach substantially identical conclusions about where solutions must ultimately come from.

Both plans would impose tough constraints on discretionary programs, including defense; limit the growth of federal health care, retirement and farm programs, and reform Social Security. Both plans would also bring in higher revenues, mainly by flattening rates and eliminating, or greatly restricting, a wealth of exemptions, deductions and credits. Relating Social Security benefits to life expectancy increases, the home mortgage interest deduction, the exclusion of employer-provided health insurance and a national sales tax were all thrown into the mix.

An obvious question is: Why propose such controversial changes? The answer is simple. These options were chosen out of necessity. Less controversial options, such as cracking down on waste, fraud and abuse, raising taxes on millionaires and withdrawing troops from Iraq and Afghanistan are not enough to get the job done.

Any serious deficit reduction plan must confront the twin challenges of demographics and health care costs. Social Security, Medicare and Medicaid currently represent 43 percent of federal expenditures and equal 10.2 percent of the Gross Domestic Product (GDP).  

As the population ages, these programs will become more costly simply because there will be many more beneficiaries. But demographics is not the whole story. Health care costs have consistently outpaced economic growth by about two percentage points annually. Older people use more health care services, so as time goes on we’ll have more people consuming a product -- health care -– that is rapidly growing in per person costs.

This combination is projected to drive the cost of Medicare, Medicaid and Social Security to 15.6 percent of GDP by 2035. The nub of the long-term structural deficit problem is thus finding a way to deal with this projected cost growth.

So how can you fit an extra six percent of GDP into a budget that is already badly out of balance? You can’t. So you have to slow the growth of these programs, spend less on other programs and raise some more money. The details of how this gets done might not be popular, but is there anything popular about a fiscal implosion?