Collective Conscious

Address­ing the short-​​term deficit is a math­e­mat­i­cally triv­ial task. Cut­ting spend­ing is the­o­ret­i­cally easy; any­one can nav­i­gate to the New York Times or CFRB web­page and check a few boxes to reduce the deficit to a long-​​run sus­tain­able level. But exist­ing spend­ing is always defended by entrenched inter­ests, so an enor­mous dif­fi­culty arises when some­one actu­ally attempts to imple­ment a plan. With our broad mix of spe­cial inter­ests, Byzan­tine bud­getary rules, and indi­vid­ual leg­is­la­tors, it is dif­fi­cult, if not impos­si­ble, to devise a plan that will be accept­able to a work­ing major­ity. How­ever, if one can unravel this tan­gle to a tar­geted few leg­is­la­tors, pro­grams, and con­stituen­cies, then a sen­si­ble and plau­si­ble bud­get solu­tion can be proposed.

The fed­eral bud­get as we know it can be mod­eled as a polit­i­cal equi­lib­rium – the most pop­u­lar pos­si­ble com­bi­na­tion of pro­grams must already be in place, since any poten­tial adjust­ment should already have been made unless it would be more polit­i­cally costly than ben­e­fi­cial. The key to deficit reduc­tion, then, is to begin from this polit­i­cally real­is­tic model. The imme­di­ate impli­ca­tion is that major changes can­not be made unless there is a shift in the under­ly­ing pop­u­lar­ity of gov­ern­ment pro­grams. In par­tic­u­lar, it is likely that the largest gov­ern­ment pro­grams are pro­vid­ing enor­mous ben­e­fits to the polit­i­cally pow­er­ful; if these con­stituen­cies did not exist, it is unlikely that the pro­gram would have been imple­mented or expanded in the first place. In other words, if a pro­gram makes a size­able con­tri­bu­tion to the deficit, it is more likely than not to be a highly entrenched pro­gram. There­fore the impe­tus for deficit reduc­tion must be endoge­nous to the process: leg­is­la­tion intended to address the deficit must pro­ceed by alter­ing the con­stituen­cies for the pro­grams that cause it so that they, in turn, can be altered.

Alter­na­tively, leg­is­la­tion could be aimed at reduc­ing the costs of gov­ern­ment pro­grams with­out alter­ing the pro­grams them­selves, thereby pre­serv­ing the ben­e­fits to cit­i­zens but dra­mat­i­cally reduc­ing the costs incurred by the gov­ern­ment. How­ever, this must be achieved with­out sim­ply shift­ing costs onto indi­vid­u­als or other lev­els of gov­ern­ment, or the prob­lem has not truly been solved, as empha­sized by the Our Fis­cal Secu­rity coali­tion in its recently-​​released bud­get blueprint.

The key ques­tion of deficit reduc­tion is the under­ly­ing source of the nation’s deficit. Iden­ti­fy­ing a fun­da­men­tal long-​​term cause requires exam­in­ing the growth rates of the var­i­ous com­po­nents of the deficit, not sim­ply observ­ing which ele­ments con­tribute the great­est share. Such an analy­sis shows that only health spend­ing – in par­tic­u­lar, Medicare – grows at a rate that is truly unsus­tain­able. Health spend­ing is respon­si­ble for nearly all of the growth in the deficit for the fore­see­able future, and expands dra­mat­i­cally as a per­cent­age of GDP. And, as empha­sized in Gokhale and Smet­ters’ 2007 arti­cle, the long-​​run Medicare imbal­ance “[accounts] for more than 100%” of the nation’s expected deficit.

How­ever, con­sis­tent with the equi­lib­rium the­ory of gov­ern­ment, this largest sec­tor is among the most entrenched of all spe­cial inter­ests. The elderly and the sick are almost always the most polit­i­cally active group, and are often among the wealth­i­est indi­vid­u­als as well. Cut­ting real health ben­e­fits is, there­fore, polit­i­cally unten­able.  The pol­i­tics are sim­ply impos­si­ble to over­come, espe­cially given that the deci­sions which affect the elderly also affect mil­lions of other Amer­i­cans and the cor­po­ra­tions which insure and care for them. Instead, the only solu­tion is to reduce nom­i­nal gov­ern­ment out­lays on health with­out reduc­ing real ben­e­fits – cost con­trol rather than a series of painful, unpop­u­lar cuts.

So long as health costs con­tinue to grow faster than GDP, it will require con­tin­u­ous reduc­tions to the bud­get to keep fed­eral out­lays at a sus­tain­able level. If health costs are not addressed, the share of fund­ing avail­able for other pro­grams will con­tinue to shrink, and adjust­ments will have to be made when­ever this pres­sure becomes a bind­ing fis­cal con­straint on the activ­ity of gov­ern­ment. As the equi­lib­rium model estab­lished, health ben­e­fits is the most unas­sail­able spe­cial inter­est, and in order to allow its growth, less pop­u­lar pro­grams must be pruned in accor­dance with the government’s bud­get con­straint. Any plan that pur­ports to address this con­straint with­out con­tain­ing health costs must be it will be reduc­ing the real ben­e­fits of other pro­grams in order to redis­trib­ute them to the con­tin­u­ously encroach­ing, enor­mously pop­u­lar health-​​care program.

The only dif­fer­ences among these plans, then, is which sec­tor they pro­pose to cut – in other words, they are dif­fer­en­ti­ated only by dis­tri­b­u­tional pref­er­ences. In any analy­sis of the bud­get deficit, it is dis­tri­b­u­tional con­cerns which are the most cru­cial, lead­ing to con­stant reviews and crit­i­cisms of method­olo­gies and outcomes. These con­cerns spark the most heated debates and the most mis­lead­ing analy­ses – for exam­ple, in the Wall Street Jour­nal arti­cle “You Can’t Soak The Rich,” the Jour­nal touts a graph that demon­strates approx­i­mately con­stant tax returns against a widely vari­able top mar­ginal tax rate, a chart which is later repro­duced by the Mer­ca­tus Center. However, both Mer­ca­tus and the Jour­nal fail entirely to address the dis­tri­b­u­tional impacts of the tax changes, and other com­menters have pointed out that the chart inten­tion­ally hides swings that are large in per­cent­age terms if not in nom­i­nal terms. It is a vicious back-​​and-​​forth, utterly unre­solv­able by eco­nomic or math­e­mat­i­cal analy­sis. It is a ques­tion of fair­ness, and there is no hand­book or text­book for that.

The deficit can­not be solved by shuf­fling funds around or adjust­ing ben­e­fit sched­ules. It can only be addressed through a health-​​care cost con­trol that cuts nom­i­nal costs with­out reduc­ing real ben­e­fits. But until that fix is made per­ma­nent, the costs of that most-​​favored group will con­tinue to crowd out the other ser­vices of gov­ern­ment. As long as that is allowed to occur, dis­tri­b­u­tional tax war­fare is sure to ensue. The deep divide between the ide­o­log­i­cal par­ties of the coun­try, and the cor­re­spond­ing dif­fer­ences in dis­tri­b­u­tional goals that this divide implies, means that solv­ing the deficit is in all respects a Gor­dian Knot. It can­not be untan­gled grad­u­ally or triv­ially, but must be addressed by a bold stroke that resolves absolute and dis­tri­b­u­tional con­cerns alike.