More on the Fiscal Cliff

The Fiscal Cliff Deal Could Destroy Medicare

Business Insider ,

5 January, 2013

Sorry to post one of those headlines that belong in "Questions to which the answer is no", but it's not me who's raising the issue; it's James Kwak and Ross Douthat.

The argument goes as follows: the fiscal cliff provided the most favourable possible circumstances for Democrats to push for a tax increase.

Nevertheless, Democrats set their initial sights rather low, by pushing for tax increases only on income above $250,000 per year.

And even so, they had to compromise, and were only able to get tax hikes on income above $400,000 for individuals ($450,000 for couples).

The once-temporary Bush tax cuts were made permanent for income below that level. This will not provide enough revenue over the long term to support America's welfare state (Medicare, Social Security, Medicaid) at anything like current levels.

Yet if Democrats couldn't get more revenue now, under the best circumstances possible, they'll never get it in the future with the pressure off. Hence, the welfare state is doomed.

Here's Mr Douthat:

[T]hese negotiations amounted to a test of liberalism’s ability to raise revenue, and it isn’t clear that this outcome constitutes a passing grade: If a newly re-elected Democratic president can’t muster the political will and capital required to do something as straightforward and relatively popular as raising taxes on the tiny fraction Americans making over $250,000when those same taxes are scheduled to go up already, then how can Democrats ever expect to push taxes upward to levels that would make our existing public programs sustainable for the long run?

Mr Kwak thinks the failure to get more revenue "sealed the fate of Medicare—as well as Medicaid, food stamps, and perhaps even Social Security." Without more revenue, we're guaranteed an eventual debt crisis, and at that point government will slash safety-net programs:

For decades, conservatives have been trying to "starve the beast"—choke off the federal government's revenue stream so that rising deficits would force Congress to cut spending. They just got a big help.

The invocation of the "starve the beast" theory here is on the money. But I don't think it means what Mr Kwak thinks it does. It's been clear for a decade or so that starving the beast doesn't work: the absence of revenues does not lead government to cut spending, particularly not on its big-ticket functions of defence, Medicare/Medicaid and Social Security, which account for over 60% of the budget.

And one thing we learned during the fiscal cliff negotiations is while Democrats are reluctant to talk about raising taxes, Republicans are so terrified of cutting entitlements that they literally will not name any entitlement cuts they might want to make.

The one gesture towards entitlement cuts in the fiscal cliff negotiations was obscured from voter ire as a technical "adjustment"—moving Social Security cost-of-living increases to a chained-CPI standard—and yet at the first whiff of Democratic opposition, Republicans turned and ran like they'd cut the wrong wire on an IED.

"What we learned," as Matthew Yglesias puts it, "is that even with a Democratic President in the White House who's eager to cut spending on retirement programs they still don't get cut. That's how robust the welfare state is." Jonathan Chait has a similar take: "At some point, we will likely face a choice of cutting benefits or raising taxes, and in the face of a simple, zero-sum choice like that, voters would overwhelmingly favor tax hikes."

But Mr Chait goes on to make a different point: while it looks as though entitlement programmes are nearly impossible to cut, just about everything else the government does is much more vulnerable. Everything from food inspections to foreign aid to environmental regulation to legal defence for the indigent to scientific research to the national parks to education to road, rail and air infrastructure to...pretty much everything.

These programmes are diverse and often have small constituencies. There is, basically, a lot of stuff that the government does. And when you ask the public, you find that they want the government to do these things. But public attention is a very limited commodity; it's impossible to actually marshal public attention to each of the individual programmes that get cut when "government" gets cut.

What's happened over the past 30 years, and in an accelerated tempo over the past two years, is that everything the government does apart from wars and transferring money to old and poor people has gotten creamed. The savings are trivial in comparison with the overall long-term debt picture, which is almost entirely a function of Medicare and Medicaid spending.

But the cuts have effectively curtailed the vision of liberals who want government to do things like invest in basic scientific research, improve infrastructure, kick-start green technology and support education. In that sense, it's true, the ability of Republicans to block Democrats from expanding the tax base has been a conservative victory.