2013 Budget: Spending Cuts Don't Address the Real Problem, Medicare

Politicians love to use big numbers when discussing deficits: the national debt stands at $16 trillion dollars, forty cents out of every dollar the government spends is borrowed, and America owes trillions of dollars to the Chinese. These statistics are all true, but they obfuscate more than they enlighten when it comes to public debate over deficits and how to deal with them. Politicians like these big numbers because they are scary, and can justify opposing any spending increases and supporting any spending cuts. For example, when Pennsylvania Senator Pat Toomey voted against funding disaster relief in the wake of Hurricane Sandy, he said "we have a $1.1 trillion budget deficit, [we can’t afford] another $60 billion right on top of that." Republicans cited the gigantic deficit numbers as their reason for forcing discretionary spending cuts in exchange for raising the debt ceiling and avoiding the so-called fiscal cliff.

Political posturing like this ignores the reality of America’s debt, which is a long-term rather than short-term problem and should not be used as an excuse to cut otherwise worthwhile spending. The deficit is so large right now because deficits are cyclical. When the economy contracts, the deficit goes up as revenues drop and spending on programs like unemployment and Medicaid increases. When the economy recovers, the deficit goes down as revenues increase and spending on economic relief programs returns to ordinary levels. This is why the current budget deficit is lower than the ones in 2009 and 2010, when the economy was in recession. Since the deficit is cyclical, the short-term deficit will largely fix itself and shouldn’t be one of Washington’s policy priorities.

Instead, lawmakers should worry about long-term deficits, which will be driven into unsustainable territory by the rapid growth of Medicare spending. In the next few decades, more Americans will use Medicare and health care costs are projected to increase far more than either inflation or average wages, and the Congressional Budget Office’s long-term budget outlook projects that these challenges will cause the cost of Medicare to double in the next three decades.

Unlike today’s cyclical deficit, the deficit caused by inexorable increases in Medicare spending will cause real harm to the American economy and will eventually force Washington into vicious austerity measures. Since the Medicare-driven deficits will occur regardless of the ongoing economic conditions, the bond market will be leery of financing them. The macroeconomic picture will resemble a more severe version of the early 1980s and 1990s, when structural deficits caused by the Reagan military buildup and tax cuts led to rising interest rates. The higher interest rate will be a major drag on the economy, as financing for everything from home mortgages to small business loans will become more expensive. A recession would likely result, driving the deficit even further as the aforementioned cyclical deficit increases are triggered. The only real option for Washington policymakers would be to make immediate and draconian spending cuts combined with large tax increases, similar to what is happening throughout Europe right now. Like in Europe, these austerity measures would cause major social and economic disruption, but the rapidly increasing cost of deficit financing would give policymakers no other choice.

Preventing this nightmare scenario should be the focus of Washington deficit hawks. To give the Republican Party some credit, they have been the only party to try and grabble with this long-term problem. The Ryan budget, for all its problems with magic asterisks, takes entitlement reform seriously and curbs Medicare costs by moving the program closer to a premium support model.

But too often, Republicans have used the rhetoric of deficit doomsday and big scary numbers to justify short-term spending cuts that will have little to no impact on the real deficit problem facing America. This is politically expedient, since deficit scaremongering provides political cover for spending cuts, and it is easier to cut small discretionary spending programs than it is to change a program that will eventually be used by every single voter. Ultimately, however, good governance is about making hard choices, and that means realizing that Medicare, not money for Hurricane Sandy victims, is the deficit problem worth worrying about.