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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

How to Think About Deficits



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Ezra Klein has written a provocative post on deficits:

A party that didn’t care about red ink in the expansionary Bush years became hysterical at the very sight of it once in the recessionary Obama years.

Is it fair to say that Republicans and conservatives didn’t fret about deficit spending during the Bush years? And are the levels of deficit spending indistinguishable? This seems like a question worth asking. In an Economics 21 staff editorial, my colleagues made an interesting observation regarding the Social Security reform debate of 2005.

 

The CBO projected that, even if the Administration’s proposed accounts had been financed entirely with new debt, the total additional pressure on the budget would have amounted to just $12 billion in 2009 and $29 billion in 2010. And even though all of these personal account investments would have been devoted to funding future Social Security benefits, these figures produced howls of anguish about the allegedly devastating effects on Social Security finances.

So five years after that debate, where are we now? Well, the recession has had a much more severe impact on Social Security finances than anything alleged by the harshest opponents of President Bush’s plan. The 2008 report by the trustees of the Social Security trust fund projected a 2009 cash surplus of $87 billion. Thereafter, that surplus declined by a full $84 billion, resulting in an actual surplus of a mere $3 billion. The same 2008 report projected a 2010 surplus of over $88 billion. Now we’re facing a likely 2010 deficit – and thus possibly a total decline of more than $100 billion in a single year relative to the 2008 projection.

Just a useful data point.

Ezra continues:

Or take health-care reform. That bill, as written, is one of the biggest steps toward deficit reduction we’ve seen in recent years. But rather than exchanging votes for stronger cost controls, congressional Republicans told people that Congress — which they are part of — would block those cost controls, and then they attacked the Medicare cuts and the excise tax as a way to derail the bill. So they refrained from making the bill stronger and they told people it wouldn’t work, thus worsening both our actual deficits and the psychological perception of deficit disaster that Brooks identifies in his column as a serious economic problem.

But as Medicare chief actuary Robert Foster — known for his blistering criticisms of the Medicare Modernization Act — has suggested, much the same could be said of the sustainable growth rate formula embedded in the Balanced Budget Act of 1997. As written, it did a wonderful job of restraining Medicare spending. Yet it envisioned savings that never materialized, and indeed that were unlikely to materialize given the incentive structures in place. Much the same can be said of the cost saving measures as written in PPACA. Many conservatives believed that cost savings in the Medicare program were necessary, yet they were skeptical as to the mechanism for creating cost savings and they didn’t think it wise to apply these cost savings to a new entitlement that would lead to increases in implicit marginal tax rates, that would lead to higher-than-projected expenditures on subsidies as firms reacted to the new regulatory environment, etc. 

Ezra concludes by arguing that congressional minorities aren’t weak enough to enable substantive progress on deficit reduction. This may well be true. But if PPACA is the key evidence that the Obama administration intends to take serious action on reducing long-term deficits, the case strikes me as pretty weak. I’d be very happy to be proven wrong on this. 



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