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The Case for Adequacy and Economic Growth Rather than Deficit Reduction and “Smart Cuts”

Fiscal slope talks have progressed, according to multiple news reports. Nobody’s talking details, which tea leaf-readers are taking as a sign of advancement (I wouldn’t be so sure of that, it seems more like standard back-room negotiating practice). But we do know that both sides are talking.

What could they be talking about? Well, we clearly have heard in the media the idea of a Medicare-for-revenue swap, with tax rates going up on the top income earners, and perhaps a process begun for tax reform over a 6-month or one-year period, with the sequester cuts replaced by other cuts throughout the system, including cuts to social insurance programs. Democrats walk away with the revenue win and Republicans walk away with the win on Medicare. This all assumes that Republicans WANT that win, and not the ability to pin the entire deal on Democrats, accusing them of both raising taxes and cutting Medicare. They’ll probably do that anyway. We know the various methods of social insurance cuts on the table, because they’re the cuts the President offered in 2011 – raising the eligibility age for Medicare, cutting Social Security by applying a less generous cost of living adjustment, and/or further means testing of one if not both programs. That Republicans aren’t asking for the dissolution of Medicare into a voucher program or the block-granting of Medicaid is seen as a concession from their side, in the topsy-turvy world of Washington.

Into this precarious arena walks Henry J. Aaron, advising progressives to think about “smart cuts” to these programs rather than heterodox rejections of any cuts wholesale.

While reports of a crisis are overblown, and conservative proposals to solve it are draconian, progressives do need to think about how best to reform the entitlement programs. The simple fact is that Social Security, Medicare, and Medicaid form a very large and growing part of the federal budget—currently 50 percent of noninterest spending. Furthermore, the phrase “entitlement crisis” has been repeated so often and so earnestly that denying its reality is more likely to damage one’s own credibility than to dislodge what is actually profound confusion. Cuts in Social Security, Medicare, and Medicaid benefits are neither necessary nor desirable and should be resisted, even as reform of the whole health-care delivery system proceeds. But political and economic realities—the need to secure majority support for measures to lower deficits once economic recovery is well advanced—make some cuts highly likely. It behooves supporters of social insurance to have in reserve program cuts that would do the least harm and might advance other meritorious objectives.

This is a straw-man argument, considering that Democrats just unanimously passed through Congress a big law that cut Medicare spending by $716 billion, and that in almost no way encountered objections from progressives. That’s because those cuts came in the form of reduced provider payments, slashes to Medicare Advantage subsidies and payment reforms that valued quality over quantity. We should probably go ahead and see if those work before mucking with the system any further, but there’s a serious of large cuts – the largest cuts to Medicare in history – supported near-unanimously by the Democratic side as recently as 2010.

The rest of this makes little sense. Demographic realities were accounted for in the building up of the trust funds and life expectancy hasn’t risen for those low-income individuals who need the insurance the most. Aaron has some ideas for smarter cuts, but it seems like adequacy gets shunted aside in these debates. Is Social Security currently adequate for seniors? Do Medicare or Medicaid provide decent enough health coverage? It makes more sense to work backward. We have 15.1% of senior citizens in poverty despite these safety nets. That’s a sign that they don’t work to the fullest, rather than a sign that they need to be cut.

The rest of the conversation is backwards. The last time we had a true reduction in the deficit was at a time of full employment in the late 1990s. This stands to reason, considering the increase of tax receipts and the decrease of mandatory spending through anti-poverty programs like food stamps and unemployment benefits that would engender. Let’s raise economic growth, raise wages, and lower unemployment, and see the effect on the deficit at that point, rather than fretting about actuarial projections 30 years into the future.

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David Dayen

David Dayen