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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

November 22nd, 2010 10:56 PM

Compromise on Social Security and Medicare? Why My Center-Left Friends Are Wrong

In recent days several center-left blogger/columnists have suggested that progressives should be happy to cut a deal now on Social Security and other issues related to the budget. The argument is that the cuts being put forward by the commissions are not that onerous, they don't involve privatization, and we could be facing much worse in the future.

While politics always requires compromise, this position misreads the economic and political landscape in four important ways.

1) The problem of the moment is unemployment. This really is a disaster for large segments of the population. That is not just a talking point.
2) The bad guy in this story is Wall Street. The financial sector is a cancer on the economy. This is precisely the moment when we should be on the attack, not running for shelter.
3) Health care costs are the real problem. This is not cheap rhetoric; health care is what needs to be fixed.
4) The overwhelming majority of the non-pundit population agrees with us.

The current economic situation really is a disaster for tens of millions of people across the country.

More than 25 million people are unemployed, underemployed, or have given up looking for work altogether. For most of these people, every day is a struggle to support their family and hold onto their home. The projections do not show any substantial improvement in this situation for years.

The priority for policy must be getting people back to work. This means increasing the deficit for the next several years, not reducing it. Cheap talk from politicians about fiscal responsibility may get votes, but it will not put people back to work. In the current situation, we will need larger deficits (or work sharing) to generate jobs.

Remember, these people are unemployed not because they did anything wrong, but because people like Alan Greenspan, Ben Bernanke and others in policymaking positions messed up on their jobs.

Following directly off this point, it is amazing how right in front of our own eyes, the Wall Street gang has managed to divert the public's attention from the wreckage caused by their greed and incompetence to the "entitlement problem" (i.e. Social Security and Medicare). This is the moment where we should be looking to restructure and downsize the financial industry.

The financial reform bill was a net positive, but it was not nearly enough to do the job. Profits and bonuses in the financial sector are as high as ever. Remember, finance is an intermediate good, like trucking. We aren't made better off by having more finance in the same way that more trucks on the road don't make us better off. A large financial sector is prima facie evidence of an inefficient financial sector.

We should be taxing the financial sector both to reduce the resources wasted in this sector (and the ridiculously high incomes) and to raise revenue for the government. This is just common sense; even the IMF is now arguing this position.

The third point is that there really is no deficit problem. The problem is health care. That is not just rhetoric; this is what the data show. In 1980, non-interest spending was 18.8 percent of GDP. President Obama's budget projects non-interest spending at 18.6 percent of GDP in 2020. This means that in 40 years spending has actually fallen slightly as a share of GDP. The story of an out of control federal budget is a complete fabrication.

In the longer term spending is projected to rise, but this is because our health care costs are projected to go through the roof. We currently spend more than twice as much per person as the average for other wealthy countries. Over the next 20 years our spending is projected to rise to three or four times as much as the average for other wealthy countries. Since we pay for more than half of health care spending through the government, naturally this will create budget problems.

However, it is a serious distortion of reality to portray this as a budget problem. The problem is health care. We have to fix it. Of course it is not easy; the industry groups and the doctors' lobbies are very powerful. But, let's be honest, the problem is health care. We can take care of the budget by cutting back or eliminating government programs, but if we haven't fixed health care, this will just mean that middle class people will not be able to afford health care. (FWIW, here's one of my plans.)

Finally, the public is overwhelmingly on our side on this one. It is the pundits who are on another planet. It is not just labor and progressive types who don't want to see cuts to Social Security and Medicare, this is also the position of the right. The balance the budget pledge of Grover Norquist's organization, Americans for Tax Reform, explicitly promises to not cut Social Security and Medicare below their baseline levels of spending. This position undoubtedly reflects the sentiments of supporters of the organization.

In other words, left and right stand together on protecting Social Security and Medicare. It is only the DC deficit-hawk industry that wants to cut these programs that are so essential for the country's middle class.

There may be a time for compromise, but this ain't it. Let's bring the debate back to the real world where tens of millions are suffering because of the greed and incompetence of many of those leading the charge on deficits. When we have a discussion that is based on economic and fiscal reality then we can talk compromise, but we have a long way to go before we have this table set right.

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