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“Our health-care problem is our deficit problem,” Obama said in September. “Nothing else even comes close.” He’s right. The Center on Budget and Policy Priorities made the point clearly in a recent report on the budget outlook. The whole game, they wrote, is Social Security, Medicare and Medicaid. “Growth in those programs accounts for all of the increase in federal spending as a share of GDP over the next 40 years,” they said. Total spending for everything else, from agriculture to education to missile technology, is predicted to grow more slowly than the economy.
The spending freeze exempts entitlement programs. That is: It’s focusing on the part of the budget that’s not a problem. Social Security, meanwhile, is on a perfectly manageable trajectory. It’s Medicare and Medicaid — whose rate of spending is driven by the rest of the health-care system — that break the budget. That’s why health-care reform was so important to former Congressional Budget Office director Peter Orszag, and why the administration pushed so hard for a deficit-improving bill that included an independent Medicare Commission empowered to control Medicare costs.
But the effort was wasted, at least from a public relations perspective. A January poll conducted by the Kaiser Family Foundation found that 60 percent of Americans thought the health-care reform bill would increase the deficit, and only 15 percent thought it would reduce it. The presidential speeches, the Congressional Budget Office’s estimates, the letters signed by dozens of leading economists — none of it had worked.
The story on the stimulus is similarly depressing. At its base, the stimulus is Keynesian economics in practice. A recession hits, and individuals and businesses become scared that they’re next on the chopping block, so they stop spending and start saving to protect themselves from the hard times to come. That drains demand from the economy, and without demand, the hard times get even harder. Government is the only player able to disrupt this vicious cycle. By sharply increasing its spending, it can generate demand, improving the economy until individuals and businesses are comfortable reentering the marketplace.
Key to this whole theory is that the government should act “counter-cyclically”: In good times, it should save and store, and in bad times, it should spend and borrow. The exact opposite holds true for businesses and individuals, which makes the whole project pretty unintuitive.
Students in macroeconomics classes learn all this in the first week of September. After a year of trying to explain it to an economically distressed nation, however, Obama basically gave up. Instead, he bowed before the entrenched, incorrect, conventional wisdom. “Families across the country are tightening their belts and making tough decisions,” he said. “The federal government should do the same.”