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Our Dangerous Budget and What to Do About It

A third approach would be to cut some mandatory spending to make room for more civilian discretionary spending. In general, Republicans have shown a special zeal for cutting both the civilian discretionary programs and the mandatory programs. In particular, among the mandatory programs they would end Obamacare and slash Medicaid, food stamps, and unemployment insurance.

The Democrats of course have rejected cuts to mandatory spending, especially on the grounds that such cuts would hit the poorest Americans at a time when poverty is high, unemployment is recalcitrant, and the bonanza of wealth for the richest Americans is unprecedented. (On the recent Forbes list, the richest 400 Americans now have a total of $2 trillion in net worth, an average of $5 billion per person.) Democrats are therefore far more drawn to arguing that more debt won’t hurt us much, and might even help.

I would like to argue for a fourth course, one with new revenues far larger than Obama and the congressional Democrats have espoused, and with cuts to the bloated costs of the health care system. That system is flagrantly and notoriously overpriced, by roughly 50 percent compared with health care costs in other high-income countries. If even half of that excess cost were eliminated through serious reforms in health care pricing, the direct federal outlays on health would fall by as much as 1.5 percent of GDP. Revenues would also rise indirectly, by as much as 0.3 percent of GDP, because lower health care costs would also mean lower itemized tax deductions on private health care plans. In total, we could probably gain nearly 2 percent of GDP in deficit reduction without sacrificing the quality of health services.

Health care reform would entail forcing today’s doctors and other health care providers to rationalize their pricing and administration, for example by legislating a requirement of one price for all patients, rather than the highly discriminatory pricing arrangements that prevail today, in which many hospitals charge whatever they can get away with, using an opaque and grossly unfair pricing system. We could also lower medical costs by increasing the number of primary-care physicians trained each year, and allowing more procedures to be done by paramedics. Hundreds of billions of dollars of savings would be achieved by cutting back the excess earnings in the health sector, including overpaid specialists, high-cost hospitals, drug companies charging sky-high prices for patent- protected medicines, and private health insurers. The heads of “not-for-profit” hospital systems could no longer expect the multimillion-dollar paychecks they are now collecting.

Progressives should also certainly support the ongoing cuts in military and intelligence spending, and additional ones pushing the military budget down to around 2 percent of GDP—a level that would still leave the US the largest military power and spender in the world. The US would have to plan on more diplomacy and fewer wars of choice, a shift that would increase rather than diminish our security.

As for civilian discretionary spending, the US needs more of it, although better concentrated. Important new civilian programs—such as low-carbon energy, upgraded infrastructure, science and technology, and training for twenty-first-century skills, such as the use of information technologies—will require new partnerships between the government and private investors. One excellent proposal, made in these pages by Felix Rohatyn,* is for a National Infrastructure Bank. The government would put in perhaps $10 billion per year at the start to leverage another $100 billion per year of private financing for roads, bridges, power grids, and coastal flood protection, among other projects. Similar public-private initiatives are needed to face the urgent challenge of climate change and to exploit the vast growth potential of science and technology, including information technology, nanotechnology, genomics, and much more.

To accomplish these goals, we will need government financing that provides a much greater role for private investors as well. I outline the costs and benefits of this proposal in the accompanying table, which shows in detail the historical values of revenues and spending, and compares the new bipartisan budget agreement with what I believe to be a far more acceptable alternative. Specifically, I would suggest that the civilian discretionary budget be targeted at 5 percent of GDP in 2023, together with defense spending at 2 percent of GDP and mandatory programs at 12.7 percent of GDP. This last figure is equal to the Democratic budgets minus the savings in health care. I would also aim to keep interest payments down to 2.4 percent of GDP by running smaller budget deficits than the Democrats now envision. In sum, total outlays in 2023 would be around 22.1 percent of GDP. We would need tax revenues of around that level as well in order to keep the debt–GDP ratio on a gradual downward path.

sachs_chart-020614

Where can the added 2 percent of GDP in revenues be raised? In addition to the loophole-closing that the Democrats have proposed, we should adopt a wealth tax on very high net worth, say 1 percent on net worth above $5 million in financial assets. This would raise around 1 percent of GDP from the very richest Americans. A new Financial Transactions Tax, as will be adopted in Europe in 2014, could also raise perhaps 0.25 percent of GDP. More aggressive taxation of offshore corporate income now hidden away in tax havens by the likes of Google, Amazon, and Apple would also bring in tens of billions of added revenues per year. The practice of letting hedge fund owners cap their federal income tax rates at 15 percent by using the capital gains tax rate should have been scrapped years ago. It is an abuse that has been maintained through the heavy political influence of Wall Street on both parties. There never was a scintilla of justification for it.

Revenue increases like these will certainly not be agreed on in the near future, at least not before 2015, and probably not before 2017. Such changes in the budget must be central to the program of a political movement; they will not emerge simply from an agreement of this Congress and White House. Yet the Democrats have stopped trying to think through the large-scale problems of the future. They have wittingly or unwittingly bought into the destruction of the civilian discretionary government even as they continue to talk about long-term investment in America’s potential.

Such investments in our future will remain a lie until we are serious once again about funding them, by cutting waste and raising revenues as needed. All of this can be accomplished, but only by facing down the corporate lobbies, including the private health care providers, the military-industrial complex, and Wall Street. Obama wouldn’t do it. Yet that’s the real change that we need.

Is such a new political movement possible? I think it is, despite appearances to the contrary. Obama’s coalition—the young, minorities, and university-educated urbanites—has shown that it is indeed a winning coalition, whether by the Democrats or even by a third party that comes to supplant them. A majority of public opinion favors action on the issues I have outlined: more taxation of the very rich, and more spending on education, clean energy, and job training. The public wants a smaller military and less meddling overseas. The problem is not with public opinion but with the narrow self-interest and social outlook of powerful corporations, interest groups, financial lobbyists, and large investors.

Obama has been brilliant in gaining and holding power, but unwise in failing to use it for progressive purposes. He surrounded himself in 2009 with unimaginative advisers and revolving-door bankers who told him to avoid major fights with the powerful lobbies. Rather than taking on the problem of inflated health care costs, he brought in the health care industry to support the expansion of health coverage. Rather than taking on the egregious tax abuses of the corporate sector and the very rich, he settled in January 2013 for an almost symbolic rise in taxes for those with incomes above $400,000. Rather than reforming the budget, he pursued a deficit-financed two-year stimulus that provoked the Republicans, piled up public debt, and achieved next to nothing for the long term. From the very start of 2009 he budgeted for a decline in discretionary government programs as a share of national income. Americans were first confused and ultimately disillusioned by the contradictions between Obama’s high-minded rhetoric about investing in the future and the reality of dispiriting cuts to those very programs.

Much as conservatives hate to admit it, the landslide election of Bill de Blasio as mayor of New York City may prefigure the start of a new swing of the national political pendulum as well. He won a resounding victory, in part by calling for a small rise in taxes to fund preschool education, a major reform that would help relieve the disadvantages faced by poorer children. The recent meeting of mayors at the White House may give a hint of possible local pressures for increased public investments and public services. We’ve been on a thirty-year course of diminished public investments in our future. The dismal results are plain to see. As the historian Arthur Schlesinger Jr. famously noted, we can observe cycles between private greed and public service at roughly thirty-year periods. Even though the new budget agreement looks like a new bipartisan consensus, I believe that it will be merely the lull before a far more decisive struggle to restore a forward-looking national strategy, and a budget to match.

—January 8, 2014

  1. *

    Felix G. Rohatyn and Everett Ehrlich, “ A New Bank to Save Our Infrastructure,” The New York Review, October 9, 2008. 

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