Debt ceiling deal ignores real driver of deficits: healthcare costs

Participants in the debt ceiling debate placed the spotlight on programs with a barely measurable impact on the deficit and put off to the indefinite future the things that really matter.

Now that Congress is finished displaying its one unquestionable skill — conniving at ideological extortion, with the household budgets of millions of Americans hanging in the balance — the time has come to calculate the damage done to U.S. fiscal policy by the debt ceiling deal reached this week.

The toll can be measured in several categories. One is the way the debate elevated deficit panic, an entirely fabricated issue in terms of today's policy necessities, to legitimacy. Another is how even within its own fantasy universe the agreement targets spending that isn't a significant problem in the federal budget, while ignoring the chief driver of deficit growth: healthcare costs.

The outstanding irony of the entire debate is that, despite the participants' declared intention not to merely "kick the can down the road," that's what they've done. They placed the spotlight on programs with a barely measurable impact on the deficit, and put off to the indefinite future the things that really matter. Why has the stock market reacted so glumly to the resolution of the debt ceiling crisis? Could it be that investors recognize that the economy stinks and this deal won't do anything to help in the near term?

Consider this example of how Congress kept its eye on the wrong ball: Virtually the only cut the agreement spells out in detail is one that would deny grad students the ability to defer interest on their federally subsidized loans until they finish their degree. The subsidy was supposedly sacrificed to protect Pell Grants, which go to low-income college students and therefore have been a target of Republicans in Washington for years.

I bet you didn't know that low-income graduate students were the culprits behind the soaring federal deficit. But it must be so — Democratic and Republican debt ceiling proposals have long agreed on slashing this benefit. President Obama is also on board, saying in his 2012 budget proposal that the subsidy is "poorly targeted."

Tax subsidies for millionaires, by comparison, apparently are targeted perfectly — they'll remain in place at least through the end of next year.

Eliminating the subsidy for grad students will save the government less than $2 billion a year, according to the Congressional Budget Office, or about five-hundredths of 1% of the nearly $4-trillion federal budget.

The change will increase the debt burden of the average grad student, who already leaves school owing $8,500, by $1,676, or nearly 20%. Aren't you glad we're not letting these freeloaders get away with anything, so we can cut the federal deficit so effectively?

As for other parts of the budget, the Congressional Budget Office has found that without any changes to current law, government spending outside of debt service and such mandatory programs as Social Security, Medicare and Medicaid will gradually decline over the next decade from 12.3% of gross domestic product today to 8.3%.

That would be the lowest share of GDP devoted to such spending since the 1930s, the CBO says. As the agency explains, the figure drifts lower because government programs tend to expand at the rate of inflation, and the economy expands faster than inflation.

Turning to the biggest mandatory programs, Social Security will be relatively docile, rising to 5.3% of GDP from today's 4.8% over 10 years. But over the same period government healthcare spending, including on Medicare, Medicaid and the child health program CHIP, will expand to nearly 7% of GDP from 5.6% today — and keep rising sharply to 9.4% of GDP by 2035.

What should be done about that? More than half of the trend is an artifact of the aging of the American population, which is a factor we pretty much have to live with. The rest is due to what the CBO terms "excess cost growth," or our failure to get healthcare costs under control.

This is something that can be achieved only by closely examining the causes of high spending; simply throwing elderly Americans off the rolls or sticking them with higher costs, as in the plan promoted a few months ago by House Budget Committee Chairman Paul Ryan (R-Wis.), raises inevitable issues of fairness and equity.

It's proper to observe that the debt ceiling deal, for all its rhetorical preoccupation with government spending, didn't lay a finger on the healthcare cost issue. Almost its only treatment of the healthcare programs at all is to protect spending on anti-fraud measures. That bows to another deathless Washington shibboleth, which is that spending on anything can be restrained by ferreting out fraud.

The preoccupation with Medicare fraud is especially touching; not long ago all the papers and news networks were full of an estimate that this category of abuse costs taxpayers $60 billion a year. The origin of this eye-catching but implausible figure, which amounts to 11% of the Medicare budget, is hard to identify, but more measured government estimates place the figure as low as $2.5 billion. That's not pennies, but it's not a linchpin of long-term healthcare cost restraint either. Nor should one overlook that the only recent program with a mechanism for Medicare cost control is last year's healthcare reform act, which purported fiscal conservatives are desperate to repeal.

The debt ceiling fight evaded the point that now is not the time to become preoccupied with limiting government spending, which is close to the only spending propping up a stagnant economy. It should not have escaped anyone's notice that the slowdown in the recovery reported last week, just as congressional pontificating kicked into high gear, coincided with the tailing off of government stimulus. Government layoffs are mounting, while private hiring hasn't materialized; the result is a sapping of consumer demand that will brake recovery even more.

The entire debt ceiling debate represents the triumph of economic ideology over economic reality. In a recent essay, Yale economist Robert Shiller — co-creator of the authoritative Case-Shiller housing price index — traces today's deficit panic to an overreaction to a misleading headline number: the ratio of government debt to gross domestic product. For the U.S. today, the gross figure is about 100% (let's say $15 trillion in debt, $15 trillion in GDP).

That figure is supposed to be scary, but as Shiller notes, there's nothing special about it, since GDP is conventionally measured over a single year and debt is paid off over as many as 30 years. And while today's figure is high, it's not nearly as high as it got in the 1940s when, you may have noticed, the U.S. also was paying for war while recovering from an economic crisis.

The danger is that this number misleads us into crafting poor policy. "The anti-debt people argue that government and taxes kill initiative," Shiller told me, "but it doesn't seem that laying off schoolteachers, firemen and policemen is going to have commensurate benefits to our psyche that will make us work harder."

The debt agreement has a handful of positive elements. It defers another debt ceiling fight until after the next election, and defers budget-cutting until at least 2012, giving the economy a bit more breathing room before it's hit with more austerity.

But it signals the end of hope for more economic stimulus now, when it's desperately needed, and an abdication of responsible policymaking. Members of Congress will slap each other on the back for ending this bruising battle. Instead, they should hang their heads in shame.