What Budget Crisis? Let’s Do Nothing Now

My Mother was a big advocate of patience. She was the anti-crisis.  In response to any panicked concerns I had about the some “crisis” that was coming, we always counseled “we’ll cross that bridge when we get to it”.  And sure enough, there was usually either no problem eventuallly crossing the bridge or there was no river to cross.  I wish Congress and the President could heed the same counsel.

The last couple weeks have built on the hysterical “budget crisis” talk of the last few months.  Politicians of both parties have trotted out grand “plans” for how to “fix the budget” crisis. Of course, by “budget crisis” they claim to mean the deficits that the government is currently running. Make no mistake, the plans being proposed are radical changes to America’s social structure, safety net, and political economy. The Republicans in the House yesterday voted a budget to phase out Medicare. The cuts both parties are proposing will be drastic.  Education spending will be slashed. Let’s consider another approach though.  Let’s think of it as my Mother’s cross-that-bridge-when-we-get-to-it approach.  The essence of this approach is that if we do nothing at all right now or for the rest  of this decade, the problem will solve itself.  In other words, the current laws on the books will eliminate the problem.

I will explain, but first I want to make a disclaimer.  First, as an economist, I do not buy into the “budget crisis” rhetoric to begin with.  As I’ve tried to explain in other posts about MMT, fiscal policy, and the government budget, I’m not worried about the government’s current deficit at all.  In fact, if anything, I’m concerned that the deficit is too small right now.  The signs are clear that we need more government spending, not less right now.  I likewise do not think eliminating the deficit completely is a worthwhile goal. Such a goal is likely to be harmful.  

But, for the sake of argument and understanding, let’s assume for the moment that we should eliminate the deficit eventually.  What do we need  to do? Cut Medicare and let seniors eat up their entire limited incomes in healthcare costs? Hand Social Security over to Wall Street?  Close all the schools? None of this kind of radical nonsense is necessary. I will let Annie Lowery of Slate Magazine do the explaining with emphasis added by me:

 The overarching principle of the Do-Nothing Plan is this: Leave everything as is. Current law stands, and spending and revenue levels continue according to the Congressional Budget Office’s baseline projections. Everyone walks away. Paul Ryan goes fishing. Sen. Harry Reid kicks back with a ginger ale. The rest of Congress gets back to bickering about mammograms. Miraculously, the budget just balances itself, in about a decade.

I know. Your eyebrows are running for your hairline; your jaw is headed to the floor. You’ve had the bejesus scared out of you by deficit hawks murmuring about bankruptcy and defaults and Chinese bondholders. But don’t take it from me. Take it from the number crunchers at the CBO. Look at the first chart here, and check the “primary deficit” in 2019. The number is positive. The deficit does not exist. There’s a technicality, granted: The primary deficit is the difference between spending and revenue. The total deficit, the number more commonly cited as “the deficit,” includes mandatory interest payments on the country’s debt. Even so, the total fiscal gap is a whisper, not a shout—about 3 percent of GDP, which is what economists say is healthy for an advanced economy.

So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama’s health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care’s cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular “doc fixes” that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

These are the CBO’s baseline projections. But, of course, Congress is not likely to let the Bush tax cuts fully expire, or slash doctors’ payments. So the CBO also prepares an “alternative fiscal scenario” that looks more like the path we expect Congress to take. It’s the alternative scenario that has the horror-show deficits. But Congress doesn’t have to act. It just has to do nothing. Or when it does do something, it has to pay for it.

That last bit is important: We want the numbers of the do-nothing path but not necessarily the policies. The fiscal future written in current law is hardly the best of all fiscal futures. For one, health care spending would comprise an enormous portion of overall spending. Right now, the United States spends about $1 in every $6 on health care. In a decade or two, based on the do-nothing plan, it would spend $1 in every $5, then $1 in every $4, and not get better health outcomes, either. Those dollars would be better spent in other industries or on other priorities. Moreover, under the do-nothing plan, the government would tax a much bigger share of GDP than it currently does, and the tax burden on the middle-class would be uncomfortably high.

But the do-nothing plan proves the point that the budget revolution does not need to be particularly revolutionary. Yes, the dollar figures are enormous, so big that it would appear to require “bold” plans that include massive new taxes or cruel new cuts. But, in fact, we don’t really need to end Social Security, sell Alaska, or ship the poor to Canada to get back in the black. We just need to stick to current law—particularly the tax and health care provisions—and then we can tinker our way toward a better, healthier economy.

That is because, by and large, the hard work of fixing the fat part of the the budget has already happened—through health care reform. The Social Security crisis you sometimes hear about is essentially a myth. The trust fund will run out in 2037, “at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.” Full Social Security solvency would require only about 0.7 percent of GDP, which you can get to by exposing income above $107,000 to the payroll tax. There is no debt crisis, either, as long as the U.S.’s lenders remain confident in the country. The crisis lies in spiraling health care costs. The Obama health care reform bill might not work, but it does contain programs that could turn the tide over time. The big wheels of deficit reduction are already turning—and it might be better for Congress to step back, stick to pay-as-you-go, and let them turn.

Yes. Annie is right. And Mother was right.  If we do nothing, then the deficit disappears because of laws already on the books and what Annie doesn’t mention: regaining full employment.  The sooner we regain full employment, the sooner the deficit disappears, assuming we leave the tax code and Medicare and healthcare and Social Security laws as they are right now.

So why is everyone in D.C. all agitated about the “budget crisis”? Two reasons. First, what they really want to do is to continue to lower tax rates for the very rich and the wealthy. The rich, after all, pay for lavish parties through lobbyists and pay for campaigns.  You and I don’t.  Lowering tax rates for the rich will create larger budget deficits. The Republican/Ryan plan to end Medicare is not a plan to “save” Medicare or to “fix the budget”.  It’s  a plan to cut medical care for seniors so that taxes can be cut on the highest income bracket payers, the rich.  Second, some people, particularly the Republican/Tea Party/Libertarian side of the aisle are actually trying to accomplish an ideological agenda.  They don’t like the welfare state. They are ideologically opposed to government services for anyone other than elites and wealthy. They have no chance of getting political support if they actually tell the truth about their agenda.  So, we have a fake crisis to solve.

3 thoughts on “What Budget Crisis? Let’s Do Nothing Now

  1. Pingback: CEO’s Pay Grows, Average Worker Pay Stagnates « EconProph

  2. Pingback: Can We Afford to Raise Taxes On High Incomes? Can We Afford Not To? « EconProph

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