What Progressive Fiscal Responsibility Looks Like

Barack Obama had his fiscal responsibility summit today, where he tried to thread the needle between arguing for public investment and deficit reduction at the same time. It's a difficult argument to make, and one that is easily hijacked, even though there are parts of it that are true.

Obama declared the country "cannot and will not sustain deficits like this without end."

He also said that he wants to reinstate a pay-as-you-go policy on federal spending programs, get rid of programs that do not work and end tax breaks for companies that ship jobs overseas.

Calling for fiscal restraint even while federal spending soars, Obama summoned allies, adversaries and outside experts to a White House summit Monday to address skyrocketing budget deficits and announced $15 billion in Medicaid money to states from his $787 billion economic stimulus package.

"As we take the steps that we must to get through the crisis we're in now, we will not lose sight of the long-term," Vice President Joe Biden said as he opened the event. Obama's No. 2 promised that the administration would be frank with the public about budget challenges, though he also said there was a need to reform the nation's health care system and wean the United States off heavy reliance on foreign oil.

I think I get what they're trying to do here. It's a plain fact that borrowing is wasteful and deficits are unsustainable unless you want to inflate your way out of them. It's also true that the problem was almost entirely brought about by the last three Republican Presidents. Too much of federal spending doesn't meet long-term priorities of the nation's people. Tax fairness by repealing the Bush tax cuts - some would argue, the Reagan tax cuts that concentrate wealth and lead to bubble economies and inequality - makes a lot of sense and would provide needed revenue. Same with reducing wasteful and outdated military spending. And the really bold move here is to re-imagine the entitlement crisis as a health care crisis. This is the killer app here - if Obama can successfully define out-of-control health care spending as the most urgent danger to the federal budget, then universal health care reform, despite its up-front costs, becomes the fiscally responsible thing to do.

Where a decade ago the looming fiscal threat of entitlement spending led economists and budget wonks to wear out their worry beads, today a more subtle understanding of our fiscal future dominates. In this telling, there's no such program as SocialSecurityandMedicareandMedicaid. There's Social Security, which has modest long-term liabilities and needs little, if any, help. And then there's health-care reform. "That," says Henry Aaron, a senior economist at the Brookings Institution, "is the big kahuna."

How this happened depends on whom you talk to. Dean Baker, an economist at the Center for Economic and Policy Research, points to the 2005 Social Security privatization fight. "A lot of people were suddenly out there arguing that there's no crisis and we don't need to do anything on Social Security," he says. That forced left-of-center wonks who'd not thought much about the crisis to confront the numbers or, more precisely, the graphs. "We've done a graphic that shows what deficits look like in every country with longer life expectancies than us and what the deficit looks like going 70 years with the same per-capita health-care costs of that country."

It's a startling image. That orange line shooting into orbit? That's our projected deficit. That blue line levitating gently upward? That's our deficit if health costs grew more slowly. And those other lines sinking downward? They're our deficit if we had the per-person health costs of countries like France, Germany, and Canada. In all cases, Social Security spending remains unchanged.

Controlling health care costs through universal care (as a BIG number one to reducing long-term debt), reducing spending on the military and wars, and instituting a fairer tax code - these are the progressive steps to fiscal responsibility. But Obama keeps stepping on his message. He apparently said today that long-term Social Security solvency is "the single most pressing fiscal challenge we face by far." That's just not true - raise the cap on FICA taxation above $106,800 and you're basically done. Alex Rodriguez doesn't pay into Social Security on 99.5% of his salary. It's just not worth bowing to Beltway elites by attacking Social Security when it has no place at all in the debate. To their credit, Democrats are pushing back on the Administration's "Social Security task force" and got it shelved. However, officials inside the Administration still have the wrong mindset:

One liberal activist who weighed in against the proposed task force told me that some within the administration are ready to attempt "one more fix" for Social Security, thinking of the 70-year-old benefits program "as an equation to be solved" and the Obama team as the mathematicians on the case.

"We just think the timing is terrible" to formally open such a Social Security task force now, this activist added. "At a time when the economy is terrible and people are losing their 401(k)s, you want people to feel more comfortable about their retirement." [...]

But while many progressives are eager to stop lumping Social Security and Medicare together, others view reluctance to address Social Security as giving in to pre-emptive fears that conservatives would hijack the process to promote privatization.

"Wouldn't it be a progressive achievement to lock Social Security in for everybody alive today and their children?" one person close to the issue asked me. "Why wouldn't we do it? [As for] how you do it, there will be a long discussion with stakeholders to get it done."

The reason we wouldn't do it is that the President has a limited supply of political capital, and health care spending is a bajillion times the problem to the long-term deficit than Social Security is. It's just not an issue of deep concern, a rounding error practically compared to health care reform. I would put all my effort into figuring out the structure and the funding for that (phasing out Medicare Advantage won't do all the heavy lifting required).

See Robert Kuttner for more.

UPDATE: Ugh. The AP got Obama's quote wrong. The full context is: "In the coming years, we'll be forced to make more tough choices and do much more to address our long-term challenges, from the rising cost of health care that Peter described, which is the single most pressing fiscal challenge we face by far, to the long-term solvency of Social Security." He said health care spending is the most pressing fiscal challenge we face, not Social Security. I should have known better than to trust AP. Sorry. I'm largely OK with Obama's stance here. Peter Orszag's remarks are great as well.

In charting a new fiscal course, we need to be clear in diagnosing the problem. The single most important thing we can do to improve the long-term fiscal health of our nation is slow the growth rate in health care costs. Health care is the key to our fiscal future.

So to my fellow budget hawks in this room and in the rest of the country, let me be very clear: health care reform is entitlement reform.

The path of fiscal responsibility must run directly through health care.

We also must recognize that reforms to Medicare and Medicaid will only succeed in the context of slowing the spiraling growth of overall health care costs.

Improving the efficiency of the health system -- so that we get better results for less money -- is therefore not just or even primarily a budget issue.

Health reform would also provide direct help to struggling families, since health care costs are reducing workers’ take-home pay to a degree that is both under-appreciated and unnecessarily large.

And for many states, health care is increasingly crowding out other priorities -- such as support for higher education, which in turn had lead to higher tuition and painful cutbacks at state universities.

All of this is why the President has said time and again that he is committed to reforming our health care system this year.

Great stuff.