Q: A question I keep wanting to ask all these balanced-budget fetishists: Should the US have maintained a balanced budget through WWII? If not, then we agree that there are some circumstances in which a balanced budget is undesirable, and all we are talking about is details.
A: OK, this is what you call one of them there rhetorical-type questions…but you’ve got a point. Debt as a share of the economy was over 100% in 1945-46 and there weren’t too many people freaking out about it (though some were). In fact, it’s notable that folks back then also suffered from premature contraculation—the well-known , for example.
But the larger point is that if you believe we’re facing an emergency or at least a serious threat to our well-being, and you believe gov’t actions can help, you’re more likely to advocate for say, the President’s jobs plan without worrying so much about its impact on the debt.
A second, equally important lesson is that following the war and a return to full economic capacity, the debt to GDP ratio began a long slide all the way to the Reagan years, when it started climbing again (see figure). This stuff is dynamic and very necessary, high debt levels now don’t imply such levels forever. This is especially the case when the spending measures are temporary.
But to get to the sustainable fiscal place, we need to get that act together as well…we just can’t do it at the expense of targeted jobs measures today.
Q: [Re my kvelling about the President’s jobs plan:] Jared, it really concerns me that you didn’t mention the cuts to Social Security, Medicare and Medicaid that Obama is going to use to pay for his jobs proposals.
A: I share your concern, especially about the increase in the eligibility age for Medicare. As I’ve , based on the work of my colleague Paul Van de Water, this kind of shifting may save money for the gov’t, but the savings are elusive—system-wide costs (public+private) are likely to go up.
Still, I think Social Security et al need to be on the table. To keep them completely off is too close to the R’s pledge to never raise taxes. As I’ll stress below, any cuts need to be balanced with new revenues as well.
It’s a high-stakes strategy, I know, as there are those who just want to kill social insurance. But to say there are no savings to be had in ‘Care, ‘Caid, or Soc Sec is not credible. We could save billions in Medicare by shifting to generic drugs (which cost about 70% less than brand names). Medicaid, on the other hand, is plenty lean already and it’s not at all clear to me how you cut there without diminishing the program’s ability to serve vulnerable families. (I recently had a good talk with a trustworthy specialist who convinced me she loses money on Mcaid patients.)
Making the switch to the “chained CPI,” a more accurate price index that grows more slowly, is definitely a Social Security benefit cut relative to current promises, but that’s another idea that I think merits consideration, especially if you use that same price index for tax brackets, which implies higher revenue collections (because people’s nominal income will pass into higher brackets a little more quickly).
Of course, what really matters most here is much more attention to cost effectiveness in health care spending, again, throughout the system—public and private—which implies less spending on procedures that have little or no benefit (or worse!). And that’s part of the Affordable Care Act.
So, I don’t come cavalierly to this position, but neither do I subscribe to the view that we can never contemplate savings in these programs. However, and this is essential, I would never accept new cuts without new revenues…never…Never…NEVER!!!