Regarding the federal budget, most contemporary analysts, pundits, policy makers and politicians (with the exception of a generally marginalized few on the left) tend to stress the need to address projected balance of payment problems associated with long-term assumptions about the federal debt and deficit. Specifically, in a 2011 report, the Congressional Budget Office contended, in an extended baseline scenario, that federal debt will remain at or above 70% of GDP from 2012 through 2085 and that, when accounting for a number of expected policy changes in the future, this percentage will climb to 200 by 2027. Furthermore, the report asserts that this prediction is undesirable due to a consensus among some economists that high levels of debt negatively impact the economy, namely because of diminished private investment and higher interest rates. In response to this, and similar predictions, many within and outside the government, from members of the Tea Party to officials in the Obama White House, have argued that government austerity, in the form of across the board reductions in entitlement spending and/or increases in revenue through tax reform, will be necessary if the government is to maintain solvency in the long run.
Although tax policy (specifically a dominant regressive taxation regime that has consistently implemented policy designed to maintain low levels of taxation on the most wealthy Americans with the expectation that their savings will yield economic growth that offsets losses to revenue, a policy regime which has failed utterly and completely), the largest defense budget in the world (with roughly $2,000 per person spent on defense in 2012) and two expensive wars in Iraq and Afghanistan are each major contributors to this problem, cuts to entitlement programs (namely Medicare and Social Security) are continually viewed by many as the most effective way to deliver deficit reduction. For example, of the $5 trillion reduction in projected ten-year deficits achieved since 2010, 77% of the cuts were achieved through slashing public spending, with only 23% due to revenue increases. Clearly, these kinds of deficit reduction initiates have a disproportionately adverse impact the working-class, poor and elderly people who rely on the financial security afforded by public programs like Social Security and Medicare. At a time of anemic growth and continued economic hardship for most Americans, with the top 1% of income earners receiving 95% of the income gains since the the end of the Great Recession, these kinds of austerity policies will undoubtably drive more struggling people into poverty and exacerbate the plight of those already there.
That said, it is important to specifically address the long-term solvency of Medicare and Social Security, as those two programs are most often cited by policy makers as in need of cutting. In the case of Social Security, which (far from being insolvent) added $95 billion to its surplus in 2011, a simple increase in the program’s payroll tax cap (I.e. the upper threshold on which a wage earner’s Social Security tax may be imposed), from its current $113,000 to $250,000, would guarantee the program’s solvency for the foreseeable future. Put another way, whereas 90% of wages were covered by the Social Security tax during the Reagan presidency, only 83% of incomes currently contribute Those with high incomes are only compelled to give a maximum of $113,000 out of their income; often times, this figure doesn’t meet the actual required percentage of their income that those earners would owe to the Social Security trust fund without the payroll tax cap that is currently in place. This loss of revenue is the root cause of any long-term solvency issue related to Social Security. By correcting this shortfall and returning to a 1980s level payroll tax cap, the tax funding Social Security would apply to around $200,000 of wages. Because this would amount to a tax hike on high income earners however, the practical viability of this solution being implemented, let alone even considered, seems tenuous at best. This is the case because the regressive taxation regime, though a failure in practice, continues to inform policy making among many American elites. Still, since 61% of Social Security recipients relied on the program as their primary source of income in 2011, this solution seems like the most effective way to both keep seniors and their families, who would presumably shoulder the often substantial financial burden of their elders’ care in the absence of a strong Social Security program, out of poverty and ensure the solvency of program. Current initiatives by Senators Elizabeth Warren, Bernie Sanders and others, aimed at raising the Social Security payroll tax cap should be supported by all working class, poor and elderly citizens.
With respect to Medicare, the primary cause of concern regarding the program’s long-term solvency is increasingly high health care costs, rather than deficiencies in the program itself. That being the case, the experiences of other advanced industrialized countries (like the U.K., a country whose economy is arguably the most similar to the U.S.) indicate that the most effective way to control heath care costs would be to introduce a single-payer health insurance system. Specifically, the single-payer system proposed in the House bill HR 676 (the Expanded and Improved Medicare for All Act, introduced by Rep. John Conyers Jr., D-Mich.), would save an estimated $592 billion annually by reducing the administrative waste associated with the private insurance industry ($476 billion) and cutting pharmaceutical prices to European levels ($116 billion). At the very least, the U.S. government could introduce an affordable public insurance plan to compete with oligopolistic private insurers; this has been done in Canada and has yielded beneficial results there. Still, the American private health insurance industry, though it yields the same or worse outcomes (at a much greater cost) than all other healthcare systems in the advanced industrial world, is among the most influential of special interests in American politics and dictates most healthcare policy in Washington D.C. (I.e. the Affordable Care Act, a.k.a. Obamacare). As a result, solutions like the one provided in HR 676 are generally not discussed in a serious manner among American elites
Worth noting in this broad discussion of the debt and deficit and their respective impacts on the economy are a number of developments which have recently taken place in academia regarding the study of this issue. Specifically, the claim that high levels of public debt inherently adversely impact a country’s economic growth, a central theme of the aforementioned CBO report stressing the need for government austerity, has been shown to be faulty, most notably by University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang in their takedown of the pro-austerity work of Carmen Reinhart and Kenneth Rogoff “Growth in a Time of Debt” (a work frequently cited by debt hawks in America and Europe). On the contrary, the work of University of Massachusetts professor Arindrajit Dube stresses that, if anything, it’s slow growth that causes higher debt. That being the case, it’s clear that austerity measures, which inhibit economic growth, actually fuel the accumulation of debt.
The horrific results of the austerity measures implemented throughout Europe in the wake of the Great Recession should come as no surprise considering the fact that the same neoliberal policies (the privatization of government services and industries, drastic reductions in government spending [other than defense spending] and the elimination of all trade protectionism) that are currently being forced on that region and strongly advocated for by most members of the American elite, directly mirror the development plans that the International Monetary Fund inflicted on the post-colonial Third World throughout the 20th century. Never mind the fact that the United States and most of the other major advanced industrial countries ignored, and in many cases continue to disregard, most of these principles (advancing along a generally state capitalist model of development during their own periods of industrialization [I.e. subsides for industries, high levels of government technological research and development, strong social welfare programs and tariffs designed to protected American goods and services at the expense of the Third World]). The same austerity based policies that retarded the economic development of the global south and impoverished entire continents in the post colonial period are now being brought home to dismantle the Keynesian welfare state. These initiatives, which seriously endanger the viability of state capitalism, should be seen for what they are: naked class warfare from the top down.
Source(s): 1) “Fiscal Facts: The CBO Long-Term Budget Outlook” The Pew Charitable (2011): accessed June 18, 2014, http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Fact_Sheets/Economic_Policy/CBO-Long-Term-Budget-Outlook.pdf
2) Thomas L. Hungerford, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945,” Congressional Research Service (2012): accessed June 18, 2014, http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf
3) Sarah Wolfe, “Global Military Spending Set To Rise In 2014” NPR (2014): accessed June 18, 2014, http://www.npr.org/blogs/parallels/2014/02/12/275885249/global-military-spending-set-to-rise-in-2014
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5) Mathew Yglesias, “95 Percent of Recovery Income Gains Have Gone to the Top 1 Percent” Slate (2013): accessed June 18, 2014, http://www.slate.com/blogs/moneybox/2013/09/10/one_percent_recovery_95_percent_of_gains_have_gone_to_the_top_one_percent.html
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7) “Fast Facts and Figures: About Social Security, 2013” Social Security Administration (2013): accessed June 18, 2014, http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2013/fast_facts13.pdf
8) “Single Payer System Cost?” Physicians For a National Healthcare System (2013): accessed June 18, 2014. http://www.pnhp.org/facts/single-payer-system-cost
9) Sarah Kliff, “Five ways the American health care system is literally the worst” Vox (2014): accessed June 18, 2014, http://www.vox.com/2014/6/16/5812898/five-ways-the-american-health-care-system-is-literally-the-worst
10) Miles Kimball and Yichuan Wang, “After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth” Quartz (2013): accessed June 18, 2014, http://qz.com/88781/after-crunching-reinhart-and-rogoffs-data-weve-concluded-that-high-debt-does-not-cause-low-growth/?oref=dbamerica
11) Arindrajit Dube, “A Note on Debt, Growth and Causality” (2013): accessed June 18, 2014, https://dl.dropboxusercontent.com/u/15038936/RR%20Timepath/Dube_Growth_Debt_Causation.pdf