Peter Orszag's Secret Service Recovery Plan: "Stimulate Now," Pay Later


Former Obama budget director Peter Orszag is now a columnist for Bloomberg, where his latest offering amounts to what might be called The Secret Service Plan for Fiscal Policy: "Stimulate Now" and Pay Later.

Those who are most worried about our long-term fiscal health shouldn't fret too much about additional stimulus today, if it is combined with future budget cuts. Stimulus now would have only a modest long-term impact on national debt. So if it can lead to a deal, while also easing short-term pain from unemployment, what's not to like?

Opponents of a combination approach make two arguments. The first is that it's too complicated. I have never seen much evidence presented for this argument, and I would like to give Congress and the public more credit for being able to do two things at once.

The second argument is that any delayed deficit-reduction legislation would be reversed by future Congresses. Why bother?

History suggests a rosier view. The increases in Social Security's retirement age were legislated in 1983—almost 30 years ago—and Congress has allowed them to take effect. The same holds for most Medicare changes Congress has passed, even those phased in over time.

Read "History Shows U.S. Can Stimulate Now, Cut Later."

For those of you still wondering how we got to point where federal spending has essentially doubled (in nominal terms) over the course of the 21st century, Orszag's column is a master class. Whether under a Republican administration or a Democratic one, the federal government has been jam-packed with people for whom today is all about writing a check that tomorrow will cash. In the long run, we're all dead, Lord Keynes quipped. And the best part is that once you're dead, someone else will pay for your funeral.

Let's leave aside the not-inconsiderable point that the president's stimulus didn't work. Why? Because fiscal stimulus tends not to work. The basic idea of a government multiplier, where a dollar of public money kicks off more than a dollar in activity, just ain't so

Orszag looks back to the 1983 Social Security reforms that have done such a good job at rescuing that program that it started running a cash-flow deficit in 2010. That means it is no longer funding current benefits solely from the taxes it takes in. And unless something odd happens, it never will again until all the money accrued in its various trust funds runs out in 2033 (the date of reckoning keeps getting closer, another bad sign).

More to the point perhaps, Social Security is already a bad deal for most workers. As Urban Institute researchers C. Eugene Steuerle and Stephanie Rennane calculated last year, most categories of beneficiaries who retired in 2010 or later will receive less in payouts than they paid into the system via payroll taxes.

To call Reagan-era Social Security reform a triumph for anything other than the persistence of a program that transfers increasing amounts of money from relatively poor and young people to relatively wealthy and old people is strange talk. To compare Congress' willingness to let the retirement age for full benefits to drift upwards over three decades with a willingness to reduce deficit spending in the future is pretty weak.

Orszag admits that his upbeat assessment of Medicare reforms—"Congress has repeatedly adopted measures to produce considerable savings in Medicare and has let them take effect"—doesn't include the "doc fix," which has precluded scheduled reductions in physician reimbursement fees to take place. And he doesn't mention the creation of Medicare Part D or the fact that the inflation-adjusted costs of Medicare (like Social Security) are headed sky-high. And that's after a decade of massive increases (see table!). If Medicare spending was in any way declining or even leveling off year over year, he might have the semblance of an argument. Between 1975 and 2010, for instance, Medicare spending per enrollee more than tripled in real dollars, from $1,985 to $9,828. I just don't see the savings, considerable or otherwise. (And talking about recent slowdowns in the rate of increase in health costs don't get you very far.)

Orszag writes, "Those who favor a combined approach shouldn't be characterized (as I have been) as pro-austerity and anti-stimulus." I'm not sure what he means by a "combined approach," but to the extent that he's talking about a need to reduce the debt-to-GDP ratio, he should take a look at how succesful austerity programs (ones that tip overwhelmingly toward spending cuts, liberalization of labor markets and trade policies, and structural reform of government entitlements) correlate strongly with economic growth.