Obama vs. the Fiscal Fear Mongers

If Barack Obama is elected president, he will inherit not just the most serious financial and economic crisis since the Great Depression. He will face an obstructionist orthodoxy about government spending that will make recovery even more difficult to achieve. The nature of our economic, social, and fiscal problems and the boundaries of the politically possible have been defined by conservatives who have often skillfully co-opted moderate liberals. Nowhere is this more the case than in the received wisdom that there is an "entitlement crisis" and that the federal budget needs to be balanced.

In a deepening recession, not only would Obama need to use deficit spending as short-term stimulus; he would need to dramatically expand public outlay to remedy 30 years of increasing inequality and the neglect of public systems. To achieve transition to Gore-scale renewable energy, he would need even more public funds. The implosion of the financial system, as a result of deregulation, will deepen recession unless offset by public investment. But if Obama buys into the myth that we can't even afford existing programs, audacity and hope will be lost before he even begins. Obama has already fallen into this trap once, accepting the mistaken premise that Social Security suffers from a mighty shortfall.

It will take great resolve to resist the supposedly high-minded--and well-funded--thinking that pervades Washington and the media. Peter G. Peterson, the onetime secretary of commerce under Richard Nixon and billionaire former partner of the Blackstone Group, has written four books over the past two decades bemoaning the cost of entitlements and forecasting disaster. Peterson recently endowed the Peter G. Peterson Foundation with a personal gift of $1 billion (about half his windfall from the sale of Blackstone) and hired as its founding president the government's former comptroller general, David Walker, a political independent with a facility for garnering good publicity with bad fiscal news. Walker in turn has influenced the thinking of foundation presidents and commentators.

"I would ask that if you leave here remembering only one number, let it be this one: $53 trillion," Peterson testified to the House Budget Committee last June. "Fifty-three trillion in today's dollars is what this country owes between our national debt, future liabilities, and our huge unfunded promises for programs like Social Security and Medicare," he continued, terming that number "unacceptable" and "un-American."

The $53 trillion figure is intellectually dishonest. It is derived by taking the worst-case assumptions about Medicare and Social Security, adding the national debt, assuming no change in social policy (such as universal health insurance) or revenues, and extrapolating these and other projected costs into the indefinite future. As the economist Dean Baker has observed, everyone expects the Pentagon to spend hundreds of billions a year indefinitely, but we don't call this "unfunded liability" because we expect government to collect taxes to pay for it. In his 1993 book, Facing Up, Peterson himself puts the unfunded liability number at a mere $14 trillion, and other estimates run as high as $90 trillion. Any gloom-and-doom estimate that can vary by orders of magnitude should be inherently suspect. But this is the received fiscal wisdom.


This conventional thinking is shared by a broad cast of characters that includes the 49-member Blue Dog caucus of fiscally conservative Democrats in the House. Among other things, the Blue Dogs blocked a more expansive stimulus package in February.

To appreciate just how disabling is the bipartisan echo chamber on the alleged entitlement crisis, consider the debate on budget restraint that raged in the spring and summer of 2008 between two rival groups of influential budget experts. The story begins with the radically conservative Heritage Foundation and one of its most effective strategists, Stuart Butler, an affable Briton with Thatcherite dreams of privatizing both Social Security and Medicare.

In 2006, Butler, with the aid of Maya MacGuineas of the Committee for a Responsible Federal Budget, collaborated with Isabel Sawhill of Brookings on a big idea: What if conservatives and liberals (with liberals implausibly represented by Brookings) could unite on a bipartisan plan to solve the catastrophe of long-term deficits in entitlement programs? The idea had both political and funding appeal. Middle-of-the-road foundations love nothing so much as bipartisanship, which reassures their trustees.

Brookings and Heritage convened a regular working group, named the Brookings-Heritage Fiscal Seminar, whose 16 members spanned a spectrum running from senior economists at the Urban Institute in the political center, to Heritage on the far right. No liberals were invited, not even those known for concern about deficits, like Robert Greenstein of the Center on Budget and Policy Priorities or Brookings' own Henry Aaron or Jason Furman (now a senior policy aide to Obama).

Meanwhile, several politically moderate foundation presidents bought the essentially conservative story about the menace of long-term entitlements--with an improbable liberal twist. Supposedly, Social Security, Medicare, and Medicaid were crowding out other outlays and undermining the possibility of needed public spending on things like housing and early childhood education. This theme was the subject of a 2006 closed meeting of foundation presidents.

One of the presenters at that session, Jonathan Fanton, president of the MacArthur Foundation, subsequently said in a June 2008 address to the Council for Advancement and Support of Education:

In January, I met with Comptroller General David Walker. He noted that the percentage of the U.S. population aged 65 and over will likely reach 20 percent by 2047--perhaps more, if life spans continue to increase. Spending on Medicare, Medicaid, and Social Security will more than double by 2050, from about 9 percent of GDP at present to nearly 20 percent. … The implications for education, social services, housing programs, and more are alarming. Virtually all of MacArthur's domestic work is at risk if the federal and state governments lose their discretion to allocate needed funds to address social and economic problems.

This analysis is profoundly misleading. The savaging of spending for children and social services under Reagan and both Bushes had nothing to do with Social Security and Medicare, whose problems exist in the future (and in the case of Social Security may not exist at all). And in the Clinton era, social outlay was blocked by the administration's drive for a permanent budget surplus.

It's true that entitlement programs have gradually been consuming more of the federal budget, but the cuts in other programs were caused by the hostility of right-wing presidents to social spending generally, by reckless tax cuts for the wealthy, and by the increases in military spending. And if these foundations wanted more social spending, about the last place on the planet to look for allies was the Heritage Foundation--a group that would oppose expanded social spending no matter what the fate of Social Security and Medicare.

However, several of these foundations had invited proposals on fiscal stability, and Heritage and Brookings successfully pitched them on a large grant for an ongoing bipartisan seminar. Ultimately, five foundations poured several hundred thousand dollars into the project, including the Annie E. Casey, Charles Stewart Mott, and William and Flora Hewlett foundations (note: Casey and MacArthur have also supported the Prospect). The Brookings-Heritage seminar then set about trying to reach agreement on a set of principles. It was here that Butler and the other conservatives took the moderates to the cleaners.

If one begins from the (dubious) premise that long-term deficits are a dire problem, any serious fiscal bargain would have to include both restoration of tax revenues as well as caps on spending. In fact, Clinton's treasury secretary, Robert Rubin, has spent much of the Bush era trying to promote just such a grand bargain. But in several rounds of discussion of the Brookings-Heritage Fiscal Seminar, the right-wingers around the table made it clear that taxes could not be part of the discussion; the Bush tax cuts were sacrosanct.

Such intransigence should have been a deal-breaker. How can social programs be on the table but not taxes? But having taken large sums from several foundations and having promised a consensus document, the group could not deadlock; it needed a "deliverable." So while the right-wingers played hardball, the moderates in the group just rolled over.


The alarmist joint statement was released last March 31 under the headline, "Taking Back Our Fiscal Future." It proposed a radical remedy that had long been a goal of the Heritage Foundation and other conservatives--automatic caps on spending for Medicare, Medicaid, and Social Security, unless Congress acted to rein them in first. This draconian remedy, Butler hoped, would logically lead either to privatization or to the replacement of these guaranteed programs with vouchers that would provide far less benefit.

Such an approach has been fiercely and successfully resisted by Democrats since the first Bush presidency. But here were some of the most prestigious Democratic budget experts signing on, including former senior budget officials Robert Reischauer, Alice Rivlin, and Isabel Sawhill, as well as former Clinton aide William Galston.

The group's composition and the report's conclusions show just how skillfully the right has been able to dominate public debate and manipulate or co-opt moderates. The Heritage Foundation and the American Enterprise Institute, in other contexts, peddle tax cuts as the cure for all ills. But put them in a room with the Brookings Institution and the Urban Institute and they become gravely concerned about the fiscal well-being of the Republic--as long as the remedy is to destroy social insurance.

Writing on the Heritage Foundation's Web site, Butler crowed that the authors had agreed that Medicare, Medicaid, and Social Security "should be converted into regular discretionary programs that compete on a level playing field with such programs as defense, rather than pre-empting funds for these programs or automatically running up long-term deficits." He added:

The authors agree that certain myths are used as excuses for not tackling the entitlement problem. Among the biggest is that we can simply fix the problem by ‘rolling back the Bush tax cuts' and raising taxes to pay for entitlement promises. The authors agree that raising taxes to the European-style levels needed for that would ‘cripple the economy.'

Several signers complained that they had not agreed to convert these social insurance entitlements to ordinary spending programs--only to budget caps--and the first claim was removed from the Heritage site. Aaron and Greenstein responded by organizing a rival group, which included Nobel Laureate Robert Solow. The Aaron-Greenstein expert group released its own report in early July, declaring, "We agree that the nation faces large, persistent budget deficits that would ultimately risk significant damage to the economy." But, the group warned that the recommendations contained in the Brookings-Heritage report could:

jeopardize the health and economic security of the poor, the elderly, and people with serious disabilities. For one thing, it does not focus adequate attention on the main driver of our fiscal problem--the relentless rise in health care costs throughout the U.S. health care system. … For another, it does not propose any action to restrain the hundreds of billions of dollars in entitlements that are delivered through the tax code and flow largely to more affluent Americans.

The rival report went on to explain that "over the next 75 years, the cost just of making permanent the 2001 and 2003 tax cuts is 3  times the size of the entire Social Security shortfall," and that tax loopholes--taken off the table in the Brookings-Heritage report--consume $900 billion a year.

As Greenstein points out, the most politically damaging thing about the Brookings/Heritage document is that it uses moderate Democrats--the senior budget experts whom a President Obama would be likely to consult--to validate the far-right storyline: that the nation's fiscal problems have everything to do with social insurance and nothing to do with tax cuts or the failure to achieve comprehensive health reform.

Why did the likes of Reischauer, Sawhill, and Rivlin let themselves be used in this fashion? After three or more decades on the front lines of budget wars, each seems to have given up on more imaginative possibilities and become a crusader for limiting entitlements.

For Sawhill, the conflict is generational. The old, she believes, get relatively too much via Social Security and Medicare, and the corollary is that the young get too little. As she writes in a recent article for Brookings:

Right now, thanks to the current contract, older Americans are the only group in our society that has access to universal, fee-for-service medical care. Younger Americans do not have such access, have seen their incomes stagnate in recent years, and yet will be expected to pay for the current generation's morally indefensible fiscal policies. As a result, without a major change, working-age families and their children will not receive the kind of help that will eventually make the nation more productive. And a country that gives priority to its elderly over its young is arguably a country that doesn't have much of a future. A new contract, then, would tighten the flow of funds to older generations and invest more resources in younger families and their children.

But why that stingy solution? Why not expand the social contract to the young rather than withdraw it from the old? Why not pay for universal pre-kindergarten by repealing the Bush tax cuts rather than by gutting Social Security benefits? This is the kind of weary, stunted liberal imagination that Obama will have to challenge.

Reischauer, now president of the Urban Institute, told me that he felt it was necessary for a high-profile, ideologically diverse group to propose a drastic remedy. In testimony before the Senate Budget Committee last year, Reischauer downplayed the impact of tax cuts. Federal revenues, he noted, were "about at their postwar average." He added, "Clearly, we must look elsewhere for the roots of the severe budget imbalance predicted for the future. And those roots are to be found in the retirement-related entitlement programs--Social Security, Medicare, and Medicaid."

Reischauer has even been wary of expanded health-insurance coverage, lest increased access produce additional costs. "Does the total system need to be reformed? Yes, but it's unlikely to be done in a way that will save costs. The interest groups are too powerful," he told me. Speaking of the dueling budget statements Reischauer added, "I was furious when I saw how Stuart characterized this on his Web site, and I would not be surprised if this is how he characterizes our statement in his speeches."

Then why get in bed with the likes of Stuart Butler? "Congress is going to have to grapple with this, and there are people like Stuart in Congress," Reischauer said. "We need to figure out where there is common ground." But as orchestrated by Butler, the common ground has been defined to place people with basically kindred views, like Greenstein and Reischauer, in warring camps--while those whose social philosophies are worlds apart, like Reischauer and Butler, are in the same club.

On "entitlements," the fiscal moderates have bought the idea of emphasizing cuts in spending first. On Medicare, they've accepted the right's premise that the idea that true national health insurance is politically inconceivable, even though it would produce great cost-savings by eliminating expensive middlemen. And since national health insurance is out of the question, we might as well hack away at Medicare and Medicaid.

But as the Greenstein-Aaron report points out, capping Medicare and Medicaid would not solve the general problem of inflation in health costs. It would only "threaten the central achievement of those programs—providing the elderly, the disabled, and the poor with access to the same kind of health care that other Americans receive."


So here is what Obama faces in terms of conventional budgetary wisdom. On the center-right, some of Washington's most prestigious Democratic budget experts are willing to put Social Security, Medicare, and Medicaid on the chopping block before addressing the issue of Bush's multi-trillion dollar tax cut. On the center-left, good liberals such as Greenstein and Aaron are also alarmed about long-term deficits in entitlement programs but want tax increases to be part of the deal.

Aaron is brave enough to say we can't do Medicare reform without general health-insurance reform. Greenstein, to his great credit, says he believes that increased deficits are needed in a severe recession, and that Social Security and Medicare as entitlement programs can be saved with sensible reforms--but it is a mark of how far to the right the consensus has swung that they are on the left wing of this conversation.

It will take true leadership from the White House to explain that no, Social Security is not in crisis; that the hysteria about "entitlements" is right-wing ideology masquerading as fiscal high-mindedness; that the cure for Medicare's problems is universal health insurance; that the cupboard is in fact not bare if we revise taxing and spending priorities. A President Obama would also need to refrain from taking his budget advice from conservative onetime liberals, who are still generally considered the cream of Democratic fiscal experts. And he will need to explain to the American people why austerity is in fact not the right cure for recession.

Adapted from Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency (Chelsea Green).

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