The federal deficit – a subject President Obama will likely talk about in his Feb. 24 address to the nation – is one of the most persistent policy problems in modern American politics.
Except for a period in the Clinton years, it has bedeviled US presidents for generations. The US system of government simply finds it hard to make the decisions necessary to get revenues and expenditures to match up for the long term.
Part of the problem is structural. The main drivers of the deficit are the big three entitlement programs of Social Security, Medicaid, and Medicare. They are not susceptible to yearly appropriations review, and reducing their cost is both technically and politically difficult.
Part of the problem may also be caused by the nature of democratic politics. The current system produces lots of partisan competition, procrastination, and obstruction – and may not foster the spirit of mutual sacrifice that budget-balancing requires.
“The regular political process has been incapable of dealing with long-term fiscal issues,” concludes a Feb. 19 joint statement from a bipartisan group of Washington budget experts.
A promise to cut
President Obama says he will cut the long-term gap in half by the end of his first term. Much of his projected savings may come from money saved by winding down the war in Iraq, and an increase in taxes on the wealthy. Obama aides have also hinted at Medicare changes.
Of course, right now red ink isn’t the nation’s biggest economic problem. With the recession deepening, Washington continues to increase federal spending at an unprecedented rate in an effort to stabilize the financial sector, rescue key industries, and stimulate US economic activity.
The deficit for fiscal year 2009 could hit $2 trillion, and will almost certainly surpass 8.3 percent of US gross domestic product, the highest such figure since World War II.
Adjusting for likely economic events and policy interactions, the 10-year deficit may be $10.2 trillion, or 5.5 percent of GDP, according to projections by economists William Gale of the Brookings Institution in Washington and Alan Auerbach of the University of California, Berkeley.
Beyond that, the gap continues as far as the eye can see. Mr. Gale and Mr. Auerbach judge that current policy, if it continues, produces a permanent gap between revenue and expenditures of 4 to 9 percent of GDP.
Recent spending has added to the deficit, of course. But the causes of the long-term gap are many and varied, and they include the spending and tax decisions made during the two terms of President Bush, under this analysis.
“The stunning shift to deficits from the budget surpluses of a decade ago has accelerated in the past year as the recession took hold, but the transition began many years ago,” write Gale and Auerbach.
Stimulus not long-term burden
According to Robert Greenstein, the executive director of the Center on Budget and Policy Priorities, the stimulus package isn’t the cause of the long-term deficit problem. That bill only adds about 0.1 percent to the long-term fiscal gap between Uncle Sam’s income and expenditures.
Nor are entitlement programs in general the problem, Mr. Greenstein told President Obama’s fiscal responsibility summit on Feb. 23.
Instead, the projected increases in federal spending in coming decades as a share of the economy are due entirely to the projected growth of the biggest entitlements: Medicare, Medicaid, and Social Security. In turn, those are becoming more expensive due to demographics – the retirement of baby boomers – and rising healthcare costs.
And between demographics and health costs, it is the latter that is most important, in terms of the deficit. Partly that is because the flood of retiring boomers will eventually ebb, but ingenuity and breakthroughs in healthcare will not, making healthcare inflation certain.
When it comes to the deficit, “the single biggest factor is rising healthcare costs, not just in Medicare and Medicaid, but throughout our healthcare system,” Greenstein told the fiscal summit.
Hard fix for healthcare
That’s a daunting problem, because healthcare is an explosive political issue. Healthcare inflation as a whole must be restrained, said Greenstein, because any attempt to curb Medicare and Medicaid alone could lead to rationing of care, or large shifts in costs to private sector health systems.
Fixing Social Security, by contrast, is a relatively easy technical problem. It will require some combination of marginal changes in retirement age, rate of increase of benefits due to the rising cost of living, and initial benefit calculation.
Politically speaking, this has been dangerous in the past. But the current economic crisis may at least improve the changes of a fix for Social Security, according to budget expert Alice Rivlin of the Brookings Institution.
“The crisis may have made Social Security less of a political ‘third rail’ and provided an opportunity to put the system on a sound fiscal basis for the foreseeable future,” Ms. Rivlin told a Senate hearing last month.