As I posted below, Republican claims about fiscal responsibility have been baseless since Ronald Reagan decided that deficits don't matter. But like Otter in "Animal House", House Republicans have decided that "this situation absolutely requires a really futile and stupid gesture be done on somebody's part." For their futile and stupid gesture, House Republicans have decided to combat the recession with . . . a spending freeze:
“We’re advocating that Congress freeze all federal spending immediately,” said Rep. Mike Pence (R-Ind.), the chairman of the House Republican Conference, during a Tuesday luncheon at the conservative Heritage Foundation. “People out there are hurting, and they understand what you do when times are tough. You make hard choices. Today House Republicans are urging the Democrats to do the same. We think it’s time that the Democrats put our money where their mouth is.”
. . . Pence’s argument for a spending freeze is widely accepted within the Republican conference. On Monday, House Minority Leader John Boehner (R-Ohio) asked Democrats to “abandon their plans” to push through an omnibus bill “and instead pass a clean bill that freezes spending at current levels.” Gov. Mark Sanford (R-S.C.) has decried the economic stimulus package because, in his words, “when times go south you cut spending.” In a conversation on Monday, freshman Rep. Jason Chaffetz (R-Utah) concurred with party leaders.
This is really, really stupid, even by the standard of House Republicans. Of course it makes sense for financially strapped consumers to cut back on their own spending, but that doesn't mean that the government should also cut back its spending. In fact, it's precisely because consumers have cut back their spending that the government should increase its spending to make up for the lost demand.
Republican claims that the government should take whatever actions would be prudent for individual consumers exhibit the fallacy of composition:
In Keynesianmacroeconomics, the "paradox of thrift" illustrates this fallacy: increasing saving (or "thrift") is obviously good for an individual, since it provides for retirement or a "rainy day," but if everyone saves more, it may cause a recession by reducing consumer demand.
Similarly, the government's decision to freeze its spending during a recession would make everyone worse off by exacerbating the recession. This is true even though it makes sense for individuals to cut back on their own spending. The lesson, once again, is that it's best to ignore what Congressional Republicans say about the economy. The odds are it's wrong.
In his reporting on the White House's fiscal accountability summit, Ezra Klein focuses on a guy we're going to hear a lot more about -- Peter Orszag, the new director of the Office of Management and Budget. First, Klein notes that fiscal responsibility has long focused on entitlements, but that there's been an important shift in the way liberal elites think about this:
Where a decade ago the looming fiscal threat of entitlement spending led economists and budget wonks to wear out their worry beads, today a more subtle understanding of our fiscal future dominates. In this telling, there's no such program as SocialSecurityandMedicareandMedicaid. There's Social Security, which has modest long-term liabilities and needs little, if any, help. And then there's health-care reform. "That," says Henry Aaron, a senior economist at the Brookings Institution, "is the big kahuna."
Per capita health care costs, it turns out, overwhelm other factors when looking at the projected growth of the budget deficit:
That orange line shooting into orbit? That's our projected deficit. That blue line levitating gently upward? That's our deficit if health costs grew more slowly. And those other lines sinking downward? They're our deficit if we had the per-person health costs of countries like France, Germany, and Canada. In all cases, Social Security spending remains unchanged.
Aaron locates his light-bulb moment in a paper written by Richard Kogan, Matt Fiedler, Aviva Aron-Dine, and Jim Horney for the Center on Budget and Policy Priorities. He remembers sitting around a table with Peter Orszag, now director of Obama's Office of Management and Budget, Bob Reischauer, who runs the Urban Institute, Bob Greenstein, who founded the CBPP, and an array of other economic luminaries while Kogan and Horney presented their findings. "The long-term fiscal outlook is bleak," they wrote, and "rising health care costs are the single largest cause."
Aaron says that the "meeting was sort of a slap-the-forehead moment. I said 'you guys are saying there is no problem other than a health-care financing problem long-term!' Credit goes to them, in my opinion."
What everyone agrees on is that the thinking entered government in the person of Peter Orszag. In 2007, Orszag was named director of the Congressional Budget Office. From that perch, he brought Kogan and Horney's thinking to the halls of Congress. Orszag liked to show a particular slide in his public presentations and speeches that broke down the interplay between the government's various fiscal commitments:
Government spending and Social Security, it says, will hold relatively constant in coming years. It's Medicare and Medicaid that chew up federal spending.
This graph, however, could be used as evidence for a simple focus on Medicare and Medicaid. The programs are unsustainable. They need to be slashed. The next slide in Orszag's presentation is titled "misdiagnosing the problem." The fiscal threat, it argues, is not more beneficiaries or the type of beneficiaries that are the factors internal to Medicare and Medicaid. It's the cost per beneficiary. Orszag has a graph for this, too:
And since Medicaid and Medicare pay for health services on the private market, this can only be fixed through broader health reform.
So, fiscal responsibility is really about entitlements, but when you look at entitlements, the real problem is Medicare/Medicaid, not Social Security. The real problem with Medicare/Medicaid, though, is the rising per capita cost of health care that affects everyone, whether they participate in Medicare/Medicaid or not. To fix Medicare/Medicaid, therefore, we have to reform the entire health care system.
It's conventional wisdom that the huge budget deficit the Obama administration has inherited plus the enormous amounts we're spending to revive the stalled economy will require that plans for health care reform be put on hold. According to Orszag, however, we can't afford to do that. Fiscal responsibility requires that we reform health care now:
"Many observers have noted that addressing the problems in financial markets and the risks to the economy may displace health care reform on the policy agenda," he wrote on his blog. Orszag went on to argue that rising health costs threaten the nation's very solvency. If they continue to grow, investors will no longer be willing to buy Treasury bonds at low rates. And if that happened, the government would lose its ability to mount the sort of costly rescue operations that have kept this crisis from turning into a calamity. "So if you think the current economic crisis is serious," concluded Orszag, "and it is, imagine what it would be like if we didn't have the ability to undertake aggressive and innovative policy interventions because creditors were effectively unwilling to lend substantial additional sums to the Federal government."
Behind Orszag's economic jargon was a startlingly aggressive message. He was essentially accusing those who would delay health reform of bringing a Zippo and a can of kerosene to the federal budget. "I have not viewed CBO's job as just to passively evaluate what Congress proposes," he tells me shortly before his appointment to the OMB, "but rather to be an analytical resource. And part of that is to highlight things that are true and that people may not want to hear, including that we need to address health-care costs."
Needless to say, this will not be intuitively obvious to ordinary Americans or even informed opinion leaders, let alone recalcitrant Congressional Republicans already gearing up to oppose whatever health care initiatives the Obama administration may introduce. Nevertheless, it is reported to be exactly what Obama intends. That will make the battle over the stimulus bill look like a tempest in a teacup.