The Wrongologist

What’s
Wrong Today:

There is a
lot of confusion regarding the Fiscal
Cliff, primarily because most politicians conflate two distinct
problems:

1. A decline in the GDP growth rate that will be caused
by the impact of automatic tax increases and spending cuts that go into effect
on January 1

2. The growing federal debt that over time could
ultimately kill our economy

The media rarely
distinguishes between them, even though the “fix” for these issues lie in
opposite directions: Any deal that only
promotes GDP growth will increase our debt. Any deal that only reduces debt will kill GDP growth.

So,
if a lawmaker really only cares about
the debt, he/she should be happy about GDP contraction but they aren’t,
because they also want to preserve the
Bush tax cuts.  

Few
citizens understand this and thus make the mistake of equating the fiscal cliff
and the debt problem. The two are conflated
so often they blur into each other.

For
example, the Washington
Post published an article titled “Liberal groups mobilize for ‘fiscal cliff’ fight over Social Security,
Medicare.” The facts in the article are ok, but you get the impression that
the fiscal cliff threatens Social Security and Medicare.

Just the
opposite is true. If your top priority is to preserve Social Security,
Medicare, and Medicaid for the long term, then
the fiscal cliff is the best thing that could happen.

Why? The expiration
of the Bush-Obama tax cuts will eliminate
roughly half of the gap between federal government revenues and expenses.
Higher tax revenues will reduce the pressure to do something radical about
entitlement spending, but not the
pressure that is due to ideological opposition to these programs.

Second,
the automatic sequesters mandated by the Budget Control Act of 2011 barely impact
the major entitlement programs. Social
Security and Medicaid are specifically exempted; most Medicare spending cuts
are limited to 2 percent. That means that the rest of the government will
get proportionally smaller, reducing budgetary pressure on Social Security,
Medicare and Medicaid.

The gang pushing to cut Social Security and
Medicare, (“Campaign
to Fix the Debt”) is in high gear. They have raised
money, recruited corporate CEOs (mostly from the financial industry) and some
washed-up politicians for a full-fledged push in the final months of the year. They
are hoping that the hype around the budget standoff (“Fiscal Cliff”) can be
used to pass a “Grand Bargain”
that will likely eviscerate the country’s two most important social programs
Social Security and Medicare.

The
“Grand Bargain” requires compromise. Ever notice
when we hear the call for compromise there
are few specifics? That’s the problem
with DC, policies based on facts,
statistics and their effects not only are ignored, we hear lies on what these
agendas will actually do.

As Dean
Baker has reported:

“They [Fix the
Debt] made a point of keeping this plan out of election year politics because
they know it is a huge loser with the electorate. People across the political and ideological spectrums strongly
support these programs and are opposed to cuts. Politicians who advocated cuts
would have been likely losers on Election Day. But now that the voters are out
of the way, the Wall Street gang and the CEOs see their opportunity.

It is especially
important that they act now, because one of the pillars of their deficit horror
story could be collapsing. Due to a sharp slowing in the rise of health care
costs over the last four years, the assumption that exploding health care costs
would lead to unfathomable deficits may no longer be plausible even to people
in high level policy positions.”

The big stick for the deficit hawks is
their story of huge deficits in the longer term. They attribute these to the
rising cost of “entitlements” which are known to the rest of us
as Social Security, Medicare, and Medicaid.

While the
deficit hawks push the notion that the aging of the population threatens to
impose an unbearable burden on future generations, the reality is that most of the huge deficit horror story is driven
by CBO projections of exploding private sector health care costs. Since
Medicare and Medicaid mostly pay for private sector health care, an explosion
in private sector health care costs would eventually make these programs
unaffordable.

However, there are
serious grounds for questioning the plausibility of CBO projections that show the
health care sector will rise from 16% to
40% of GDP over the rest of the century. Recently, a paper from the
Federal Reserve Board questioned this argument in considerable detail. It is
a tough read, but the basic argument is: the CBO projection is straight upwards
to the right and we know that trees can’ t grow up to the sky.

The recent trend in actual health care
costs
is as important as the debate over health care cost projections. While the CBO
projections assume that age-adjusted health care costs will rise much more
rapidly than per capita income. But, in the last four years per capita income has
been keeping
pace with health care costs.

In fact,
in the last year costs of health care services, (equal to two-thirds of total health
care costs), rose by just 1.7%.
This is less than the rate of nominal
GDP growth over this period. While some of the slowing in the rate of health
care cost increases is undoubtedly due to the loss of jobs by insureds because
of the economic downturn, it is at least partially attributable to slower growth
in health care costs.

Revising
the CBO health cost projections to an alternative like that suggested by
Federal Reserve study will take tens of trillions of dollars off the most commonly cited
long-term deficit projections.

That will cost
deficit hawks $100 trillion of their long-term deficit story. This would be a real disaster for the Fix
the Debt and the deficit hawk industry.  

This is
why the Campaign to Fix the Debt
will be operating in full conflation mode until a budget deal is reached.

If the CBO
adjusts its long-term health care cost projections downward, then the Fix the Debt’s
rationale for gutting Social Security and Medicare will disappear.

Wouldn’t THAT be a crisis.