While I previously stated a desire to avoid cherry picking Henry’s posts, I really couldn’t disagree more with this in Henry’s post on the budget deficit:
I am highly skeptical of the Obama team’s insistence that financing health care reform first is the best way forward. While lowering health costs in America—an enormous issue best left to its own post—is critical for our long term economic strength, I think making drastic eliminations to our government entitlements ought to be the immediate priority.
As commenter jackofspades83 says, millions of Americans rely on so-called entitlement programs, and cutting them in the midst of a recession would have dire consequences. Further reduction in the spending gap would result in an even worse economic outlook as those who already spend a high share of their income would be forced to spend even less. Of course, this doesn’t even address the cruelty of imposing drastic cuts to social security benefits, from which a full two-thirds of elderly households (65 and up) receive more than half of their income and a full third of elderly households receive over 90 percent of their income.
As for health care, let’s just look at this graph that was put together by the Center for Economic Policy and Research. It plots out how various levels of health care spending in other countries would look if applied to the United States. The skyrocketing blue line is a world where we fail to enact any health care reform at all.
As you can plainly see, the easiest way to lower the deficit would be to lower health care expenditures so they matched per capita spending in other countries. As you can also plainly see, failing to do so will exponentially increase the share of health care spending as part of GDP. Now, it’s quite possible health care legislation currently being considered won’t have that sort of impact, but to illustrate what even modest savings do to spending, the Council of Economic Advisers put together this report.
Even if we assume only .5 percent cost containment, the results are pretty sizable as we move forward. If we select the very realistic 1.5 percent, we begin to see enormous savings as we extrapolate outwards. From the report’s executive summary:
[P]roperly measured GDP could be more than 2 percent higher in 2020 than it would have been without reform and almost 8 percent higher in 2030. The real income of the typical family of four could be $2,600 higher in 2020 than it otherwise would have been and $10,000 higher in 2030. And, the government budget deficit could be reduced by 3 percent of GDP relative to the no-reform baseline in 2030.
Those are serious numbers. Given that the article Henry himself cites reports that only 3 percent of the deficit would come from Obama’s agenda on health care, it’s really difficult to see how now is not the time to reform the health care system. It would be like refusing to use a credit card to have a plumber fix a pipe that’s threatening to flood your entire basement.
Now, as for concern over Treasury yields, let’s look at another graph, this time of the historical rates of 30 Year Treasury bonds.
You’ll note that the interest rates on Treasury bonds are still very low by a historical average, but more to the point, as Martin Fox argues here, this is a healthy balancing of priorities as investors decide there are more worthwhile investments than the least risky proposition around. Consider as evidence the ability of many banks to repay TARP funds with capital they have raised privately. And with respect to China — whatever their misgivings — there’s simply no avoiding the fact that as owners of such large quantities of US debt, it’s in China’s best interest for the US economy to prosper. As Gao Xiqing, president of the China Investment Corporation argued about the bailout in December:
With so much of China’s money at stake, did U.S. officials consult the Chinese about the rescue plan?
Not directly. We were talking to people there, and they were hoping that we would be supportive by not pulling out our money. We know that by pulling out money, we’re not serving anyone’s good. Including ourselves. So we’re trying to help, at least by not aggravating the problem.
Finally, I’m not sure why Henry elided the possibility of raising taxes. The fact is, after 30 years of Republican electoral domination, taxes have been reduced to an unsustainably low level, and they’re going to have to come up.