Real Fiscal Responsibility & Deficit Politics: Democrats

[digg-reddit-me]This is part 3 of a 4-part series of posts. Part 1 provided an introduction and description of the groups that benefit from the government spending status quo: the elderly, the military, the poor, and big corporations in that order. The overall societal status quo clearly favors all these groups except the poor. Part 2 described the main political dynamics behind what the Republicans are doing, along with their solutions; it explained why Republicans oppose government intervention in principle, and yet protect the status quo because it benefits those interest groups that support their party – the elderly, the military, and the big corporations. The solution to this political dilemma is to “starve the beast,” to protect the status quo until it becomes so catastrophically unstable that it has to be dismantled; which explains why, when in power, Republicans have both cut taxes and increased spending – protected today’s elderly at the expense of tomorrow’s elderly while trying to force Democrats to take responsibility for the undoubtedly unpopular solutions to the deficit problems created by Republican administrations.

Given this, the next question is: what is the Democratic approach? Do they seek to dismantle the programs that benefit the Republican interest groups? Have they figured out the political answer to the politics of “starving the beast” that so benefit the Republican Party? In short, the answer to both is no. Social Security and Medicare do benefit the elderly – who were the only demographic group to go Republican, even in the aftermath of Bush – but they are historic Democratic programs. They represent in some sense liberalism at its best* – an attempt to soften the roughest edges of capitalism, to ensure that our grandparents and parents are taken care of in their old age. It’s not clear that the Democrats have the political will to go about rescinding subsidies of various sorts to big corporations or to dramatically cut military spending. This doesn’t simply motivate Democratic voters, but the backlash caused by doing so could hurt the party. And the Obama administration’s approach of blaming the short- and mid-term deficit on Bush’s irresponsibility is of decreasing political utility, even if it has the benefit of truth.

What the Democrats offer is at best a partial solution in the hope that before the time is too late, the Republicans will abandon their destructive “starve the beast” strategy. In short, the Democrats are finessing the issue – to avoid the hard clashes that the Republicans claim are inevitable, and that Republicans while in power have made almost inevitable.

What the Obama administration offers now is a 3-part plan – one that is, to some degree, a Hail Mary pass, a desperate attempt to ease long-term deficit before it is upon us.

Step 1: Keep the Economy Going. Part of the urgency for the stimulus early in Obama’s term was the knowledge that if the economy was not growing, then the staggering short term deficits incurred by the Bush administration could prove crippling to the economy. The only way to pay off the debt without causing significant social problems at home or defaulting on the debt is to have a growing economy. This is how stable nations have gotten out of deficit holes such as the one we are in, and how we almost painless paid off massive debt following World War II, following the stagflation of the 1970s, and again in the 1990s. (A constantly growing economy also happens to be an implicit part of the social bargain at the heart of the American dream.)  The stimulus was needed because keeping the economy growing was essential to easing the fiscal pressure on America’s mid-term debt.

Step 2: Health Care Reform. Policy wonks – led by Office of Management and Budget Director Peter Orszag – have seen this fiscal timebomb coming for some time. They can see the two root causes of the rapid growth in projected federal expenses:

(1) the aging of our population and

(2) the rapidly rising cost of health care, which has been growing faster in America than in any other nation in the world for the past several decades.

As they cannot change the former, they decided to address the latter. The Obama administration has made clear that their primary goal is reducing the growth of health care costs, even at the expense of extending coverage, and the plans consist mainly of a hodge-podge of measures that would tinker with how health care is paid for and how people obtain health insurance, using some previous Republican proposals which focused on cutting costs as models.

As a necessary precondition for rationalizing our current system, the plan would also significantly extend health insurance – following Milton Friedman’s observation that as health insurance approaches universality, political incentives change to allow for more cost control (even in wholly private systems.) In part this explains how the current health care bills has become not only the most significant effort to expand coverage, but the most significant attempt at cost control in a generation. Mark McClellan, director of the Center for Medicare and Medicaid Services under George W. Bush, for example, called the bill “the right direction to go” while suggesting medical malpractice reform would also be good. (However, as Ron Brownstein observes, “since virtually, if not literally, none of [the Republicans] plan to support the final health care bill under any circumstances, the package isn’t likely to reflect much of their thinking.”) The bill includes pilot projects for almost every other cost control program that those interested in health care believe has promise.

The hope is that if we act now before the imminent wave of Baby Boomer retirements, we will soften the impact of the fiscal timebomb that is entitlement spending. Then, programs can be adjusted without being slashed – as proponents of the “starve the beast” approach would prefer. Our debtors, including the Chinese government, have thus taken a keen interest in the steps we are taking to curtail the growth in health care costs. As one prominent Chinese economist has said, “At some point, if you refuse to contain health care costs, you’ll go bankrupt.”

Step 3: The Grand Bargain. These first two parts were the easy ones. This part is where it gets tricky. If the first two parts of the plan work, the pressure for massive change will be relieved. The mid-term deficit incurred during Bush’s term and during the early Obama years will be less painful in the face of a growing economy. The long-term deficit will still be a problem, but not an insurmountable one if health care costs stop growing so rapidly. Each of these will take tremendous pressure off of our fiscal situation – but neither are enough to make the status quo sustainable. At this point, Obama has said he hopes to strike a “grand bargain,” putting everything on the table, and engaging in a frank discussion of tax reform and entitlement reform, of how America collects money and what it spends the money on. At the moment, with the idiocrats dominating the public debate, this doesn’t seem a very promising route.

Tackling these issues would be many times more explosive than health care as so many groups have a stake in maintaining the status quo. And the biggest flaw in the plan is that by relieving the pressure, the Obama administration may simply put off the day it will be dealt with – no matter how determined they are to deal with these issues. But breaking the grip of the idiocrats was at the core of the promise of Obama’s campaign. And these are core issues Obama was elected to address.

*Contemporary Democrats do not – contrary to the caricature Republicans push – think government and centralized control is the solution to everything; but they do believe that government can be a force for good, that through democracy we can make modest steps and institute policies that improve our society. And despite an organized campaign to suggest otherwise, history has demonstrated this to be true, from the the founding of our nation, the building up of our infrastructure, to that giant social engineering project called abolition, to Social Security and bank regulation, to the Civil Right Movement.