To Escape Economic Purgatory, Feds Must Spend More Money

Posted October 27, 2009 at 4:57pm

When I first heard about the plan to give every senior on Social Security $250 because there will be no cost-of-living adjustment, I laughed until it hurt. It hurt a lot.

[IMGCAP(1)]Rudy Penner, the intellectually honest and insightful former head of the Congressional Budget Office, hit it right when he trashed the plan as utterly fiscally irresponsible, especially given that seniors as a group are far better off than any other age group when it comes to net worth and ability to navigate through the tough times. But Penner noted how delighted he and his wife would be to have a $500 dinner at Citronelle courtesy of more hard-pressed American taxpayers.

A cost-of-living adjustment is supposed to adjust for inflation — meaning the amount goes up when inflation exists but doesn’t when it is negligible. Establishing a precedent that Social Security payments go up regardless of whether there is inflation is very bad, especially when it occurs at a time of immense fiscal stress and when every dollar spent via the federal Treasury should be carefully weighed against the many competing priorities and against the need to bend the many cost curves that will pose a huge fiscal problem in the coming decade and beyond.

I am not a political naif. I fully understand the reasons for this giveaway that go beyond the reflexive desire to give obeisance to seniors. The White House wants to provide a buffer against strong opposition from many seniors to health care reform, a double whammy of those worried that the cuts in future Medicare growth will reduce their benefits and those who are unwilling to give up the taxpayer-subsidized extra benefits that exist in many Medicare Advantage plans. That is not all. There are many fiscal strategists who believe that we still face a deflation threat, requiring more stimulus; since the partisan and ideological divisions won’t support a second major stimulus package, this one will do — nearly all the money going out here will be spent, providing a nice additional jolt to an economy that needs it.

The $1.4 trillion deficit this year is a frightening number, but I agree with Roll Call contributing writer Stan Collender and many other analysts that it is actually not a sign in and of itself of fiscal disaster or irresponsibility. Using real, not made-up numbers, it is indeed $400 billion less than what we had earlier projected. And it reflects in large measure short-term spending and tax cuts that were absolutely, compellingly necessary to keep us from falling into the abyss of deflation and depression. Many Americans still don’t realize how close we came to Depression-like disaster, and how much the fiscal policy the Bush and Obama administrations pursued in 2008 and 2009 were responsible for keeping us out of economic hell, even if the result was economic purgatory.

We will be in that purgatory for some time, and we need to spend money not just to get out of it but to cushion the blow for people caught in the wash. That means extending unemployment benefits, trying better than we have to prevent homeowners who have played by all the rules from losing their homes through foreclosure because of circumstances beyond their control and trying to prevent a commercial real estate collapse that rivals the residential one.

And yes, among those who need a cushion against a tough economy are poor seniors. But giving money to affluent seniors right now is a really lousy way to begin to prepare for the fiscal crisis to come, especially since we will be adding to the fiscal pressures with health care reform. It is necessary to reform the health care system, and necessary, I believe, to move as rapidly as possible to universal coverage that will expand the risk pool and make devices like pre-existing conditions obsolete. But no matter what the Congressional Budget Office says, health care reform is likely to increase deficits in the out years, exacerbating the big problems to come. Add to that the fact that politicians in both parties have scrambled to insist on extending or making permanent many of the Bush-era tax cuts, crimping our revenues, and that the president has ruled out any tax increases on those making less than $250,000.

Is there an answer? Can we spend big-time now to stimulate a deeply sluggish economy and avoid disaster, make big initiatives like health care reform and climate change, finance two wars and our necessary commitments abroad, and still keep from creating hyperinflation and huge interest rates down the road?

I wish we could count on Congress to spend now — and then exercise fiscal discipline through the normal legislative process. I wish we could get bipartisan agreement, ideally within the rubric of health care reform, to slow the growth rate in Medicare through genuine reform of the system that changes incentives and reduces unnecessary procedures. I wish we could get real tax reform that not only creates a better, more efficient and more productive tax system but that raises the revenue realistically needed to keep deficits from exploding out of control. I wish we could alter the Social Security cost-of-living adjustment to reflect more accurately the real cost of living for seniors — and stick to it — and reform the system to protect and enhance the benefits of those who really need them.

But all of those things require the kind of foresight and bipartisan leadership cooperation that is always a scarce commodity but is barely a trace element now. I have reluctantly come to the conclusion that Sens. Kent Conrad (D-N.D.) and Judd Gregg (R-N.H.) have the right concept. The only way we have a chance to make Democrats and Republicans in Congress confront the brutal, long-term fiscal realities and act on them is to create a new commission built on the base-closing model. Whether the commission they recommend, consisting only of current Members of Congress, can work better than the gang of six did to craft bipartisan support for health care reform is an open question. I would prefer some lawmakers and some from outside Congress, such as Warren Buffett or Paul Volcker. But an action-forcing commission is probably our only hope.

Norman Ornstein is a resident scholar at the American Enterprise Institute.