It is often very difficult to ascertain the objective truth in the U.S. through the media, due, I believe, to a skewed institutional framework that rewards conventionality and group-thinking over being the archetypal intrepid reporter. There is no clearer example of this corrosive trend than in the sphere of economic reporting - where money is on the line - and no better an example of this than in the media's constant misrepresentation of the federal deficit.
Wednesday, February 20, 2008
In the past I was one of those who bought, hook, line, and sinker, the media's portrayal of the calamitous nature of our trillion dollar deficit. I understood very clearly that Clinton had surpluses, while Bush has deficits - very large deficits at that. I grasped the concept of a eminently doomed social security system, and a federal budget spiraling out of control. It was quite simple really: we went from a "surplus" to a deficit of $9.2 trillion. To me, the lay-economist, that does not sound too good. And I was not alone. I had most of the media along with a myriad of guest commentators warning me of economic Armageddon if the budget "crisis" was not fixed. For example, just the other day - Feb. 15 - The New York Times ran a profile of the billionaire-cum-government-watchdog Peter G. Peterson. The piece glowingly portrayed this rich man - complete with a heroic profile picture - who, after a long life of making lots and lots of money - and being taxed at 15% - has decided to start a foundation to warn the country about the looming budget catastrophe brought on by "costly entitlement programs, ballooning government deficits and cozy tax arrangements".
This is all fine and good until one realizes that deficits are not bad, social security is a compact made between governments and workers that would be wrong to be broken, and the biggest source of woe in the "entitlement" - social safety net - program is Medicare, which is due to the fact that the U.S. health care system is in shambles. That's a lot to take in all at once, so lets start by looking at the not-so-disastrous deficit.
The truth is that a mere deficit number is completely meaningless. Yeah, sure, $9.2 trillion sounds like a lot of money, but until we compare it with the size of our economy, it is irrelevant. I'll give a quick example: say we are in a small country, Jamaica, with a GDP of $10 billion. Now if Jamaica wanted to borrow, say $9.2 trillion, they would first want to make sure their economy was creating enough wealth to pay off the interest on that loan - fund the debt. Obviously, with a GDP of $10 billion dollars it would be impossible. More realistically, Jamaica could fund a debt of maybe half their GDP - $5 billion - the interest of which could be more easily repaid - Jamaica's actual debt burden is 135% of GDP, very high. The U.S. on the other hand has debt amounting to 34% of GDP, high, but not that high. Deficit to GDP is important, because without that comparison, it is impossible to put a raw deficit number in context.
This is why all this fear mongering is preposterous. That does not mean there can not be a discussion of U.S. debt, but what I suspect is that a discussion is not what many of the people calling for steep cutbacks in government services in order to control the debt have in mind. We can go back to Peter Peterson and his critique of social security to understand their motives better.
Social Security is an agreement between the government and workers that if we pay a certain amount of our paycheck to the government in order to fund todays social security recipients, we will, when we hit retirement age, have the workers of the future funding us. A simple agreement that works remarkably well. The growth of social security payments as a percentage of GDP is actually quite modest - see here - and while some tweaking of the system may be in order, social security is projected to remain solvent with all current formulas intact through 2046.
As I hope I have shown - with the help of many liberal free-thinkers, like Dean Baker, Paul Krugman etc. - is that the problem that, truth be told, conservative fat cats are crying wolf about is not a problem after all. With that said, there is one aspect of our debt that is worrisome and does need desperately to be fixed: Medicare/Medicaid health care.
The largest ballooning cost the U.S. faces today comes from Medicare and Medicaid, due, in full, to a dysfunctional health care system. What is needed is not a little tinkering here and there - see Hillary/Obama health care initiatives - but a complete restructuring of the health care industry, from private HMO and insurance providers, to the disastrous pharmaceutical industry. Single-payer is the one and only answer to this ongoing, and dangerously expensive crisis. The fact that all of the Peter Peterson's out there are not talking about this, the main issue, is telling.