This set of claims confines the disparate issues of how we should provide adequate social insurance for young and old with issues of fiscal responsibility and reform.
As the United States confronts the largest economic crisis since the Great Depression, it is time for a reasoned and balanced dialogue about the state of our nation's finances and our fiscal future.
During this period of great anxiety, uncertainty, and confusion, the public debate would benefit from perspective that informs Americans rather than compounds fears.
Full-page advertisements in newspapers depicting an ominous iceberg close at hand, for example, are not constructive in promoting reasoned responses to the genuine but manageable challenges confronting the United States.
Organizations including the Peterson Foundation, the Heritage Foundation and the Brookings Institute have joined in promoting a skewed and narrowed definition of the problem, which, while stating that all options should be on the table, define the choices in ways that move toward lowered social investment for ordinary citizens and public needs, usually described as "entitlement reform." For instance, a February 19 statement on Barack Obama's Fiscal Summit called for "a degree of sacrifice impossible under the existing policy process."
Steering the debate toward the high road requires disentangling three distinct challenges facing the nation:
. Addressing the very real threat of continued economic decline by investing in social and physical infrastructure.
. Reducing the nation's long-term debt trajectory through responsible tax reforms and change in spending priorities.
. Preserving our system of social insurance, including Social Security, Medicare and Medicaid.
Here is an overview of the fiscal landscape that in important ways differs from the more alarming picture that has come to dominate the debate:
Perspective on Federal Deficits and Government Spending
First, should we have rough fiscal balance over the business cycle? Most economists would say that, except in emergenices such as the current financial collapse, moderate deficits of 1 percent or 2 percent of Gross Domestic Product are sustainable indefinitely, as long as the economy is growing faster than the debt so that the debt-to-GDP ratio is stable or declining.Second, what share of GDP should public outlays consume? It is possible that America's well-being, especially the well-being of the young, requires increased social investment in education, training, early childhood education, child care, and affordable housing. But we can still have responsible fiscal policy by balancing social outlays with revenues at a higher fraction of GDP. This is an option that has been overlooked in the debate, which up to this point has largely conflated lower spending with fiscal balance.
At the heart of the argument is that there is more than one road to an economy of shared prosperity and opportunity.
The high road recognizes the need for sustained investments in education, energy alternatives, infrastructure and health care. The low road represents a status quo on tax policy and drastic spending cuts in social insurance.
The reality is that it is not necessary to choose between social investment and fiscal prudence. We can have both if we finance the costs of well-designed and comprehensive social insurance, and reform our health system.
The federal government now spends about 20 percent of GDP. And due to tax cuts of both the Reagan and Bush eras, the pre-recession revenues totaled about 16 to 17 percent of GDP leaving deficits of 3 to 4 percent. These deficits will rise sharply during the recession.
When the recession ends, we need a sustained increase in public outlay to satisfy unmet social needs, and a budget that is close to balanced.
A good target for the long term would be federal outlays of about 25 percent of GDP to finance investment in early childhood education, a conversion to a green economy, and other needed social investments.
Federal revenues should be about 23-24 percent of GDP. That, of course, would require additional taxes. Good candidates for increased revenues would be a restoration of pre-Bush tax rates on the upper brackets, improved tax enforcement directed at tax evasion by the very wealthiest, as well as a small transfer tax on financial transactions.
The Public Debt
The true figure for debt -- that is, on which actual interest is paid by taxpayers -- is the public debt held by the public, estimated as of February 2009 to be about $6.64 trillion, according to the United States Department of Treasurty.
This figure is just over 40 percent of GDP, which is a far smaller portion than at any time during the quarter-century after World War II, a period of record economic boom.
The most important measure of the real debt burden is the ratio of public debt to GDP.
The debt ballooned during World War II, when we incurred huge annual deficits to re-arm America to defeat the Axis powers. Among the virtuous side effects of all that public spending were the recapitalization of U.S. industry, the re-training and re-employment of tens of millions of workers, and massive investments in science and technology.
All those investments bought a much more productive economy, and fueled the great postwar boom -- a period when the economy not only grew to an annual rate averaging 3.8 percent a year for three decades, but also when Americans across the income spectrum, and fueled the great post-World War II boom. And it was also a period when the economy not only grew to an annual rate averagomg 3.8 percent a year for three decades, but also when Americans across the income spectrum prospered while the economic inequality remained relatively modest. If public debt was crippling, the postwar boom could not have happened.
The comparison to today's situation is instructive. The debt-to-GDP ratio was about 120 percent of GDP at war's end. But within three decades, it had come down to a low of less than 25 percent of GDP because during the boom years the deficits were moderate, and the economy grew much faster than the debt.
Today, the most urgent concern is to prevent a second Great Depression, not to make fanciful debt projections for 2050. The single most important actor affecting the debt load in 2050 is the health of the real economy. If it takes deficit spending of 10 percent or even 15 percent of GDP per year for two years to put the economy back on the path to steady growth, that will be far more of a service to our children than having them inherit a prolonged depression.
If the public debt increases, say, 70 percent of GDP by 2011 as part of a necessary recovery program, the debt rate can then come down to something more normal once growth returns, just as it did after World War II.
Social Security
The Social Security program faces a relatively small 75-year budget shortfall, currently estimated by the Congressional Budget Office at 0.38 percent of GDP. The shortfall figure is so small and the margin for error so large that the program is effectively close to balance.
The economic assumptions used to produce that figure include a low rate of GDP growth, and slow wage growth. If wage growth were to return to the post-World War II trend relative to productivity gorwht, Social Security would be in perpetual surplus. Even if it turns out that the projected deficity is real, very small modifications in the sysem's tax collections or payout formulas would return the system to surplus.
Social Security is not in crisis, and relatively minor adjustments to the payroll tax would ensure the program's long-term fiscal soundness and benefits for future generations.Medicare and Medicaid
The fiscal challenges facing Medicare are indeed serious. Medicare will go into deficit within a decade if nothing is done; but Medicare's cost inflation is a reflection of the extreme inefficiency of the larger health system of which it is a part.
Since 2000 Medicare's inflation rate actually has been lower than the private parts of the system, if we do not convert the larger health care system to universal health insurance, while making actual structural reforms needed to contain health care inflation, Medicare is on a relentless path to reduced benefits.
Absent comprehensive health reform and unviersal insurance, Congress will be forced to shift more and more costs to individual subscribers. This has huge social class implications, since more affluent retired people will be able to supplement barebones coverage with private resoruces, while ordinary Americans will not.
How to receive universal coverage as rational health policy and as a more efficient use of scarce resources, must be the subject of an urgent national debate. But far too much of the current debate centers on an 'entitlements crisis' which does not exist. The
crisis we face is a health care crisis.
Being Responsible to Our Children
One of the key strands of the fiscal conservative claims is that the national debt will result in lower living standards for future generations, or more recently, that the recovery package amounts to a 'generational theft.' Both of these claims are patently false, and divert attention from the real challenges facing today's young people to political football.
First, the living standards of our children are a function of two variables: whether we can get the economy back on a path toward higher growth and whegther we can provide the social investments necessary so that our children can become productive citizens and workers.
To sacrifice necessary social outlays on th altar of budget balancing is about guaranteed to prevent economic recovery and to reduce further the needed investments that yung Americans are already being denied.
Consider life from the perspective of 25-year-old Americans. For a great many of these younger citizens, their living standards are already below thsoe that their parents ejoyed at their age. The reasons have nothing to do with the national debt and everything to do with stingy social policies and wage inequality.
Young adults face a very steep path of entry into the middle class: high costs of housing, of health care, debts incurred to pay for college, expensive child care. Looking forward, they face diminished pension coverage. These are costs to the young and reductions in their living standards right now, not in 2050.
To sacrifice necessary social outlays on th altar of budget balancing is about guaranteed to prevent economic recovery and to reduce further the needed investments that yung Americans are already being denied.
Consider life from the perspective of 25-year-old Americans. For a great many of these younger citizens, their living standards are already below thsoe that their parents ejoyed at their age. The reasons have nothing to do with the national debt and everything to do with stingy social policies and wage inequality.
Young adults face a very steep path of entry into the middle class: high costs of housing, of health care, debts incurred to pay for college, expensive child care. Looking forward, they face diminished pension coverage. These are costs to the young and reductions in their living standards right now, not in 2050.
Conclusion
An honest debate about our economic future is required -- one that addresses the real and very distinct challenges confronting us today.
All too often this debate has been framed as an entitlements crisis or a problem of unfunded liabilities that are leading America down a path of economic destruction. But this is the wrong debate. The real debate is about what kind of social investment we need to ensure our nation advances in the 21st century and identifying responsible and sustainable mechanisms to pay for it.
The preceding is a part of a joint project of the Century Foundation and Demos. Founded in 1919 by progressive businessman Edward A. Filene, the Century Foundation is a nonprofit public policy research institution committed to the belief that a mix of effective government, open democracy and free markets is the most effecgtive solution to major challenges facing the United States. demos is a multi-issue nonpartisan public policy research and advocacy organization that works to influence public debates and catalyze change.
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