After a lot of sturm und drang, the fiscal cliff has been put off for a couple of months. Some modest tax increases, no real spending cuts, and the US lurches forward for another 60 days.
It’s not a horrible result, and it seems broadly in line with what the voters said in November: they are worried about the deficit, but don’t want whacking cuts (or even modest trims) to the entitlement programs that benefit the middle class, and they also don’t want whacking cuts to the military budget in what they still perceive as a dangerous world.
At VM, we haven’t spent a lot of time covering the fiscal cliff. It looked to us like one of those stories that the entire press corps chases to exhaustion—a mechanical rabbit that gets all the greyhounds in hot pursuit. We didn’t think our readers needed a lot of help from us to follow the twists and turns and it also seemed clear that nobody would ever reread the titanic surge of breathless reports on every rumor from every congressional aide. There are a few people who have such definite stakes in a story like this that they need to follow every devious twist in the plot, but for most serious news followers, it’s a smarter strategy to skim this kind of coverage. Most of it is wrong, and almost all of it will be irrelevant once the much-speculated on event actually takes place.
The whole fiscal cliff performance reinforced our view that neither party is ready to tackle the country’s real problems. Ultimately, the deficit is a consequence rather than a cause of America’s troubles; the politicians have been behaving like doctors quarreling over how to alleviate a symptom with neither group thinking clearly about curing the actual disease.
We think the critical deficits in America are policy deficits rather than fiscal deficits. There are three big policy failures in modern America that are causing most of our pain. They are connected, and they are solvable, but so far the political system hasn’t really engaged with them, in part because America’s intellectuals as a group haven’t done the kind of creative thinking and research that could point the way forward.
The health care policy deficit. If Medicare and Medicaid costs were on a long term sustainable basis, the federal government’s financial problems would be easily manageable. The current Washington entitlement debate is a terrible one. One side supports largely unlimited spending because it doesn’t want to cut benefits; the other wants to cut benefits that people need and rely on because the costs otherwise threaten to sink the Republic. Both sides make valid points: we need a health care system that takes care of older people, and we need a system that we can pay for.
What the country really needs, but isn’t getting, is a debate on how to get a health care system that we can pay for and that does what we want it to do. Single payer proponents claim that a European style national health care system would get this done, but in our view they are wrong. Increases in treatment options and life extension plus demographic change mean that society’s demand for health care is going to grow very rapidly. The only way to meet this need is to transform the health care system, largely through the benefits of IT, so that it becomes much more efficient and productive. Single payer systems and government run health care generally lock us in to existing patterns and as government’s role as both regulator and consumer grows, every interest group in the country will get involved in what turns inexorably into a lobby-managed health care system. That would be a recipe for total disaster and unfortunately Obamacare is bringing us closer to the health care policy cliff rather than helping us escape it.
In the health care debate as it stands, the most important single debate the country needs to enter, neither party has a clue about what to do next and that failure to engage with the real issues is one of the key reasons our current debates are so bitter and futile. But make no mistake: if we get health care policy right so that over the next generation we develop a truly effective and innovative health care system that works better and costs less than what we now have, the federal government’s fiscal problems will be manageable without huge sacrifices on anybody’s part. If we fail at that task, we are in a world of ugly. It’s really that simple.
The ‘transition from blue’ policy deficit. As VM readers know, we think the decline of the blue social model and the need to move from a late stage industrial society to an early stage information society is the major task before the country today. Essentially, this involves reorienting our society to capture the benefits of the information revolution in ways that dramatically increase our productivity as a society. It involves coping with the continued decline of manufacturing employment, a shift away from lifetime employment in big box companies to more entrepreneurial and flexible economic relations, and the reconstruction of the learned professions (medicine, teaching, civil service, law and others) as the information revolution does to the learned guilds what the industrial revolution did to workers like the spinners and the weavers. This is a hugely complex transition and there aren’t many examples we can look to for ideas: the United States is on the cutting edge of a transformation that will ultimately affect the whole world. All of us feel the effects of the break up of the blue model, but our national debate about the nature of these changes and the best policy responses to them is woefully inadequate and underdeveloped.
The demographic transition policy deficit. The social insurance programs that we rely on and many of our models of building and funding things like infrastructure originate from a time when rapid population growth and a youthful society were taken for granted in the US. Each new generation would be larger than the one that came before, and the ratio of workers to retired people would rise over time. Two things have changed that calculation: falling birth rates and rising longevity. As a result, almost every defined benefit pension system in the country from Social Security down through state and local government systems to union pension funds is in trouble. Fewer people are paying into them and more people are taking more out of them than their designers expected.
This is not a permanent problem; what we are looking at is a demographic transition issue. But it is a very real problem for the next 30 to 50 years. It is more acute at the state and local government level, and at the level of private business than it is at the federal level, in that the federal government is better able to fund Social Security than state and local governments can fund their retirement programs. But the fiscal strain that the transition puts on the federal government limits resources available to the states and cities as well; the pain trickles down.
The generations need to share the pain; neither retirees nor working people should bear the full costs of the necessary adjustments. Raising the retirement age and indexing it to longevity would dramatically help matters; shifting from defined benefit to defined contribution plans generally speaking makes sense (though Social Security can remain an exception); reducing COLA provisions is a way of imposing marginal losses on existing retirees in the least painful way. Again, though, if we manage health care and the transition from blue well, these other issues can be managed more easily and with less pain. If we fail on the health front and stay stuck in the dying blue model, the pension and Social Security problems become unmanageable.
These three policy deficits are the key to our current fiscal problems. Get these things right and everything else gets easier to solve. Get them wrong, and no matter how we struggle over the arithmetic, fiddle with tax rates, nickel and dime entitlements or try to divide the costs, everybody loses.