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WEALTH OF NATIONS

Keep The Focus On Health Care And Taxes

When jobs are disappearing and people are losing their insurance, guaranteed health care coverage and affordable policies are entirely to the point.

The focus is on jobs. Now what?

President Obama says he gets the message from Massachusetts. Expect a new focus on jobs and living standards. Expect fresh attention to overgrown public borrowing. The country's pressing concerns, he says, will be his own priorities.

 

Fine. Now what? Closer attention to these problems will only underline how little the administration can do to solve them. Saying "jobs, jobs, jobs" does not create any. This is a campaign slogan, not a policy.

The country does not want a second fiscal stimulus. The first was unpopular and another would make the debt problem worse. As for reining in borrowing, there are two ways to do that: lower public spending and raise taxes. When it comes to specifics, people oppose both.

Just what this sharp new focus on the economy is going to achieve is therefore unclear. Caps on student-loan repayments and expanded child care tax credits, as proposed this week? I do not see these turning the economy round. The president calls for a temporary freeze on nondefense discretionary public spending, which is less than 20 percent of the overall budget. Again, not exactly radical -- even if it happens.

 

Are these the bold policies that the health care debate has distracted us from? Obama's critics say that the focus on health reform was his big mistake. I disagree. In fact, cost control in health care, especially Medicare, is indispensable for long-term fiscal discipline. The White House was right about that. The problem was that its plan raised costs in obvious ways (subsidies, expanded Medicaid) and pressed down too vaguely elsewhere: lots of good ideas and experiments, not enough action. What the administration said about cost control in health care was right in principle but not believable in practice.

It was the correct subject, though. Aside from the fiscal aspect, health care reform belongs front and center in the effort to lessen the economic insecurity of the middle class. When jobs are disappearing by the millions and people are losing their insurance, guaranteed health care coverage and the affordability of policies on the individual market are entirely to the point. Of course, people want immediate relief, not help that kicks in years from now. Still, was it really so hard to link the issues in the public's mind? Economic distress and health insecurity: There, I just did it.

Health care reform was no distraction. Once the first economic stimulus was in place, health care deserved its place at the top of the agenda. If the reform effort now fizzles out, leaving the administration to turn its laser-like focus to jobs and the budget, we will see how little it subtracted from useful actions in those areas.

Health care reform belongs front and center in the effort to achieve fiscal discipline and lessen the economic insecurity of the middle class.

 

On jobs, the chief constraint is economic. Simply put, there is not much more that Congress or the White House can do.

The government had one shot at passing a big, well-designed stimulus. The one that emerged was pretty good, in my view. It should have been bigger and more front-loaded, and it should have included more tax cuts, but these are quibbles. We can never prove that the stimulus either succeeded or failed, because we cannot know how bad things would have been without it. Unemployment is still very high and the recovery is sluggish. But a year ago, most people would have happily settled for a slow recovery starting in the second half of 2009. At the time, they feared much worse.

On the view that the stimulus worked, why not stimulate some more? There might be room for a little more, but -- setting aside the difficulty of selling this to voters -- it would be a gamble.

Fiscal stimulus faces severely diminished returns. Figures released this week by the Congressional Budget Office underline the point. On the CBO's current-law baseline, the public debt gradually stabilizes at around 65 percent of gross domestic product -- up from 40 percent in 2008 -- and the annual budget deficit moderates to about 3 percent of GDP, down from nearly 10 percent this year. That looks unalarming, until you look at the components.

"Current law" assumes historically low growth in spending. More important, it assumes that Congress will allow the Bush tax cuts to expire -- including the reductions for those earning less than $250,000 a year, which Obama has promised to retain. It also assumes that the alternative minimum tax (the parallel tax code, originally intended to limit the ability of the rich to reduce their taxes with deductions) will catch ever more people, most of them far from rich. These assumptions deliver, in effect, a colossal tax increase. Revenues from the individual income tax would rise from 6.5 percent of GDP in 2010 to 10.9 percent in 2020, an increase of nearly 70 percent.

That is hard to imagine. A much more plausible "current policy" assumption would expect lawmakers to patch the AMT each year, as they have up to now, so that its expansion is slowed. A reasonable assumption would also expect Obama to keep his pledge to roll back the Bush tax cuts only for those with higher incomes. On this basis, the annual budget deficit would stay around 6 percent of GDP year after year, despite the recovery, and the debt would explode, reaching 85 percent of GDP before the end of this decade, and continuing to grow.

In short, the country's fiscal position is out of control. Another big round of stimulus would redouble concerns about long-term sustainability. The greater likelihood and imminence of much higher taxes or an outright fiscal crisis would unsettle consumers and businesses. Whatever good further stimulus would add in directly boosting aggregate demand, it might very well equal -- and then some -- alarm about the fiscal and economic outlook.

In micro terms, the government can and should adjust its fiscal stance, moving spending to programs that spur jobs more effectively. It can spend smallish sums on new initiatives and well-aimed tax cuts, and expect smallish effects. Even if the politics allowed, though, Washington would be foolish to embark on a massive new fiscal stimulus.

In fact, the economy may have reached the point where long-term fiscal restraint would boost confidence enough to deliver a perceptible short-term push. Certainly, long-term restraint and short-term stimulus need not be at odds.

But how to achieve this long-term restraint? The politics look impossible, even though the problem is clear. The fiscal controls are set in place, so inaction means ruin. Ignore this problem, and it definitely will not go away: Outright fiscal collapse is only a question of when, not whether. But the quarrel over how much to cut spending and how high to raise taxes will divide an already-polarized Congress more bitterly than any other issue so far. The public, meanwhile, will oppose both. On top of all this, Congress, bad at most things, is terrible at long-term thinking and worst of all at binding itself and its successors to long-term commitments. And such commitments are what this problem requires.

Congress, bad at most things, is worst of all at binding itself to long-term commitments -- which are what this problem requires.

An effort to move forward on this fell at the first hurdle this week. The Senate voted down a proposal to create a powerful bipartisan commission on fiscal policy, aimed at fast-tracking measures to raise taxes and cut spending, avoiding the usual legislative delays.

One good sign was that Democrats and Republicans came together in voting for the plan, and it achieved a majority of 53-46, if not the 60 votes required. Less encouraging was a 97-0 vote in favor of exempting Social Security from any expedited legislative mechanism that would avoid filibusters. Before the process even starts, Capitol Hill takes a crucial piece off the table. Members of Congress may talk about the risk of fiscal collapse, but they do not really believe it. Perhaps they have been distracted by health care.

Obama supports the idea of a fiscal commission, and he might create one by executive order. Congress could rethink and support a more timid version than the Conrad-Gregg proposal it rejected this week. Even if something of the kind happens -- and I suppose it would be a good thing -- the country eventually has to start talking about spending cuts and tax increases. However ingenious the legislative procedure, in the end it comes down to that.

Congress cannot lead this national debate. Obama will have to -- and he needs to frame the issues in the broadest way. Job one is tax reform. The U.S. tax code is so badly designed that you can raise plenty of additional revenue without raising rates. Instead, you broaden the tax base by simplifying the system and eliminating deductions. That does not make the effect painless, but it helps. Also, as difficult as achieving it will be, there is scope here for bipartisan cooperation. Obama needs to refresh his reputation in that area. He should get on it.

The harder part is entitlement reform, but this too will have to be done. Confronting the unchecked expansion of Social Security and, especially, Medicare is not an option -- not unless your plan for fiscal health is: 1) Wait for the collapse and, 2) Deal with it then.

Wasn't that our plan for the housing bubble?

This article appears in the January 30, 2010 edition of National Journal Magazine.

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