Tuesday, April 19, 2011

Our Debt is Driven by Bush's Policies, Not Obama's

Just setting the record straight.


TJE said...

So are you in favor of getting rid of all Bush tax cuts?

TJE said...

Isn't CBPP a bunch of socialist wingnuts?

TJE said...

What about Medicare and Medicaid?

PBM said...

I have already said I'm for getting rid of all Bush tax cuts.

On the Medicare and Medicaid, I assume you are asking where they are in the chart, not whether I would cut them. I think that they are represented in the "deficit without these factors" line at the bottom. Medicaid might get into the "economic downturn" part too since it has had to expand with the growing number of poor during this recession. That is a good question though, and one that I think Patrick will be better able to answer.

Patrick_L said...

Short response: Very little Medicaid and Medicare spending would be captured outside of the “deficit without these factors” line in this chart. Medicaid and Medicare aren’t problems in this decade.

(Technical note: About 10% of the total recovery measures area could be attributed to Medicaid- but that spending was only in response to the economic downturn. I’m not enough of a budget wonk to be able to give an equivalent estimate for the economic downturn area- but I know it’s likely to be just as small- this area largely represents the decline in revenues due to the downturn, and the increased interest costs as a result.)

Essentially this discussion is getting at the big distinction between short-term deficits and long-term deficits. Short term deficits are fueled by part-Bush year policies and part-Obama year policies. Bush-year policies include the wars in Iraq and Afghanistan and more importantly- the deficit-financed tax cuts. Obama’s policies are the recovery measures he enacted. Those, combined with the economic downturn, fuel our short-term deficits. Without these factors, we would run very tiny surpluses for this decade- as indicated by “deficit without these factors” line. All the other areas of the budget (Social Security, Medicare, Medicaid, non-security discretionary, security discretionary levels not including the military interventions in Iraq and Afghanistan) would almost entirely be balanced by the revenues from a tax system without the Bush tax cuts. Without the Bush tax cuts, military interventions, economic downturn, and Obama’s response- we’d have tiny deficits. In the last decade (2000’s), without the Bush tax cuts and military interventions the country would have actually run surpluses. For these decades (2000’s and 2010’s), the costs of government and entitlement programs are almost entirely contained by a system of revenues without the Bush tax cuts.

Medicare, Medicaid, and Social Security are long-term deficit drivers (aka out in the 2020’s and beyond). They start really mattering next decade, and then rapidly increase in size over time. Social Security has a much smaller impact than Medicare and Medicaid, largely being financed completely in the current system. The changes needed to address that program are really quite modest. The problems there come from the baby boom and the resulting increase in beneficiaries and decline in contributing workers. That’s why Social Security quickly upticks, but then relatively quickly levels off in terms of size of spending/deficits.

Patrick_L said...

Medicare and Medicaid are the real problems- they have huge, incredibly scary effects on the outer-year deficits (which then has the effect of increasing deficits which increases interest payment costs significantly as well). This effect comes from two things- rising health care costs system-wide and the baby boom trend as well (the baby boom obviously impacts Medicare, but also explains much of Medicaid’s problems because the elderly and disabled costs component of Medicaid are the ones rising the fastest, which would combine with the increasing number of elderly in the Medicaid program due to the baby boom). These rising entitlement (largely health care) program costs could not be contained by our “current” (without Bush tax cuts, which by-law expire soon) system of revenues. To maintain fiscal balance (no deficits), we’d need to substantially increase revenues beyond the levels possible with a tax system without any Bush tax cuts. This is considered an unsustainable path for the U.S.

(Quick note: I am not arguing that the U.S. should take this path- in fact I’d argue against it, but it’s important to remember that these rising health care costs and revenue levels would only move the U.S. into average OECD territory in terms of government size. We’d still have significantly less government and taxation than the Nordic countries, so it’s clear these long-term trends are sustainable, just not so for the American-style and level of government. If we don’t want a Nordic-size of government, a sentiment I completely agree with, then we need to act soon on these long-term problems while we still have lots of options, time to experiment, and need to only make very gradual changes spread out over time. The U.S. still has significant slack between its level of government and that of other major European countries, even the ones with smaller governments. This is a big source of optimism for the U.S.- European government spending/revenues are so much larger than ours but they still achieve good growth, so it’s clear that the U.S. has significant slack and room to maneuver. We have no need, nor should we, allow our government to grow to such a size- but we probably could while still having a viable and strong economy. At least that’s what the comparative example shows us. I REPEAT: I am most definitely not arguing for this level, just trying to put this debate and trends in perspective).