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The Agenda

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

In Light of the Debt Ceiling, Are All Spending Cuts the Same?



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Joey Fishkin writes:

The McConnell proposal would trade policy leverage for political leverage. Instead of a big policy victory—the massive cuts to domestic programs including Medicare that the Republicans were very likely to win as the price of increasing the debt ceiling—McConnell aims for a different kind of victory: forcing President Obama to “own” the increase in the debt limit, not one time but three times, between now and November 2012. This victory provides a new and cynical twist on the logic of what Daryl Levinson and Rick Pildes call “the separation of parties, not powers.” [Emphasis added]

The Levinson-Pildes article is worth reading, and we should revisit it another time. For now, I’d like to stick with Fishkin’s narrower claim. Fishkin maintains that “the massive cuts to domestic programs including Medicare that the Republicans were very likely to win as the price of increasing the debt ceiling” would have represented a “big policy victory.” This is a claim we’ve seen a great deal of recently, i.e., that President Obama has conceded everything that fiscal conservatives could reasonably expect on entitlements, and that serious fiscal conservatives would embrace these concessions while agreeing to more revenue. 

A few things to keep in mind:

(1) Are fiscal conservatives primarily devoted to massive cuts, regardless of how those cuts are structured? This might be true of some fiscal conservatives, but I don’t think that it is true of all of them. Embracing the particular cuts advanced by President Obama would not, in my view, represent much of a “big policy victory.” As James Capretta has argued, Medicare needs structural reform rather than across-the-board cuts to provider payments and physician training programs:

 

And so we learn in recent days (see here and here) that Democrats are willing to put sizeable Medicare and Medicaid “cuts” on the table. Among the changes that are reportedly under consideration are further reductions in what providers of services and products are paid, trims in Medicare’s support of hospital-based physician-training programs, and importation of Medicaid’s pharmaceutical-rebate scheme into the Medicare prescription-drug benefit for the so-called “dually eligible” (that is, the elderly who are enrolled in both programs). And apparently some Republicans are willing to play along.

These kinds of changes in Medicare and Medicaid are nothing new. Various versions of them have been included in every budget deal going back 30 years, and most especially in the bipartisan deals of 1990 and 1997. They do not constitute genuine entitlement reform. They will not fix Medicare and Medicaid. And they will not solve the nation’s budget problem.

Yes, on paper, the Congressional Budget Office will say they save money, perhaps even a lot of money. But CBO has said that every time a budget deal in the past has included similar provisions. As the years go by, the savings always vanish in the regulatory complexity of the programs, and entitlement spending continues to rise just as it always has. Moreover, arbitrary across-the-board payment cuts are actually damaging to the efficient operation of the health system. They lead to cost shifting, and they drive willing suppliers of services out of the marketplace. In the end, price controls do nothing to change the underlying reasons for cost growth.

The cost shifting claim is controversial. But Capretta’s basic point is that using administrative levers is likely to prove far less effective, and far easier to reverse, than shifting to a premium support model. And there is room for compromise in terms of how the premium support model would work, e.g., it could preserve traditional Medicare as a public option, thus easing the transition problem. So a shared embrace of something like the bipartisan Domenici-Rivlin plan really would represent a “big policy victory.” 

(2) What are we counting as spending reductions or as revenue increases? There were hints earlier on that congressional Republicans might accept revenue increases via clean reductions in tax expenditures that would fund a permanent AMT fix, a recognition of the presumed political reality that the AMT will be “patched” in the coming years. This would be different from, say, rolling back the high-income rate reductions and applying all of the proceeds to deficit reductions, or phasing out deductions above a certain income threshold.

(3) Keith Hennessey addresses the claim that the president’s preferred approach is to the “right” of Bowles-Simpson. He outlines a number of health reforms, Social Security reforms, and tax reforms that were in the Bowles-Simpson proposal but that are not part of the president’s approach.

 

Chairman Bowles found that, to get three Senate Republicans to support a net tax increase, he needed to repeal an expensive new health program, tick off the trial lawyers with malpractice reform, establish a pilot program for Ryan-Rivlin style Medicare reform, and place a cap on total health spending. He needed to increase the eligibility age not just for Medicare, but also for Social Security, and he needed to slow Social Security spending growth through changes to the benefit formula. He needed to tick off government worker unions by prospectively repealing their special exemption from Social Security. And he needed to agree to tax reform that would raise total revenues while dramatically lowering top individual and corporate rates.

President Obama has been unwilling to make any of these changes, and yet suggests Republicans are being unreasonable for not agreeing to net tax increases. The President refuses to discuss changes to the trillion dollar new health entitlement he and Congress created last year. He refuses to discuss changes to Social Security beyond a CPI correction. He insists that top tax rates go up. He attacked Paul Ryan for his long-term Medicare reform and refuses to consider it.

At least as important, Bowles & Simpson offered a long-term fiscal solution in exchange for this net tax increase, under which spending would never have exceeded 22% of GDP and deficits would have quickly dropped below 2% of GDP and eventually reached balance. That’s too much spending (and too high taxes) for my taste, but it’s qualitatively different from and far superior to the President’s proposal, which is to trade permanent tax increases for only a temporary slowdown in government spending growth and budget deficits.

I’m not a fan of spending caps, because I believe that they lead to heavier reliance on opaque off-budget vehicles. But I think that Hennessey is right to argue that while Bowles-Simpson commits to raising more revenue than the president’s approach, it is to the “right” of the president. A settlement built around Bowles-Simpson really would be a “big policy victory.”



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