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Deficit Distraction Disorder

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Dean Baker
AOL News, December 3, 2010

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When the school is on fire and the kids are still in the classrooms, you don't debate the color to paint the cafeteria, unless of course you're a Washington insider. 

We are experiencing the worst economic crisis since the Great Depression. Almost 15 million people are unemployed, 9 million are working part time because they can't find full-time employment, and millions more have simply given up looking for work altogether. Unemployment climbed to 9.8 percent in November. 

More than 2 million families are expected to lose their home to foreclosure in the next two years. More than a quarter of mortgage holders are underwater, and house prices are again falling rapidly, promising to push more under. 

The massive baby boom cohort is at the edge of retirement, with almost nothing to support themselves other than Social Security. The collapse of the housing bubble wiped out the home equity that was the major asset for most middle-income families. The stock market plunge devastated 401(k)s for those who were lucky enough to have accumulated anything. 

But in the middle of this economic disaster, the talk in Washington is not focused on getting people back to work, keeping them in their homes or ensuring a secure retirement. Rather, it's on bringing down the projected deficit in 2020 and beyond. 

This is a discussion intended to fix a nonexistent problem. We have a large deficit in 2010 because we had an economic collapse. Full stop. 

Everyone knows this. When the economy goes down the tube, tax collections plummet. The government also pays more money in unemployment insurance and other benefits. 

In 1995 the Congressional Budget Office projected a deficit of $284 billion for 2000. In fact, the government ran a surplus of $236 billion in 2000. 

This $520 billion (5.2 percent of gross domestic product) switch from projected deficits to large surpluses was not accomplished through big budget cuts or tax increases. It was the result of faster than expected growth. The unemployment rate in 2000 was actually 4 percent, instead of the 6 percent that had been projected five years earlier. 

The current deficits are due to economic weakness. If we get the economy back to its potential, most of the deficit problem goes away.

The deficit commission was created on the altogether false premise that government spending is out of control. In fact, government spending, excluding interest on the debt, is barely rising. In 1980, it was 19.8 percent of GDP. Non-interest spending is projected to be 21.1 percent of GDP in 2020. An increase of 1.3 percentage points over 40 years doesn't fit most people's definition of "out of control."

There are scary projections of large long-term deficits for the more distant future, but these are attributable to our broken health care system. We currently spend more than twice as much per person on health care as countries with longer life expectancies. This ratio is projected to rise to three or four times as much in the decades ahead. 

If health care costs do follow this path, it will lead to enormous economic problems, including budget problems, since we pay for more than half of our health care through government programs like Medicare and Medicaid. However, if we get our costs in line with the rest of the world, we would be looking at huge budget surpluses, not deficits. 

For this reason, serious people focus on fixing the health care system. There are huge potential savings from ending government-granted patent monopolies on prescription drugs. We can also allow everyone to buy into Medicare and save on administrative costs. Or we can let Medicare beneficiaries buy into the more efficient health care systems in other countries and split the savings.

Of course these changes will infuriate powerful interest groups like the drug and insurance industries. But this is where serious people would look to address the long-term deficit problem -- not taking Social Security and Medicare benefits away from middle class retirees.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

 

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