The Debt Squeeze: Who Should Take the Fall?
by Gene TeSelle
Gene TeSelle, formerly president and long-time
Issues Analyst of the Witherspoon Society, has written this as a
sequel to his article "Taking
Responsibility for the Future" in the Spring 2009 issue of
Network News, pp. 16-19. He explains that it is an
attempt to understand, and that he would welcome corrections and
Just send a note >>
A headline in early February, 2010, said that
health care expenditures had risen last year to a record 17.3
percent of the Gross Domestic Product, double what they were a
decade ago, and that the percentage could rise to 20 percent ten
years from now.
Bill for Health Care
People are living longer because of improved
health care, and the older they get the more health care they
need. Those who are over 65 are eligible for Medicare, which has
been a bonanza for medical specialists, hospitals, and equipment
manufacturers — and, in the last several years, for the
pharmaceutical companies, which have received about $40 billion
a year from Medicare's Part D, the Prescription Drug Plan.
Bills to Medicare keep rising as medical
procedures and equipment become more and more sophisticated. The
chief beneficiaries are the major medical centers, most of them
linked with universities, and the for-profit chains like HCA,
invented by the Frists in 1968. But even the major medical
centers are squeezed as Medicare reimbursements are reduced and
states try to cap what they will pay per patient.
Not so fortunate are the community hospitals,
the last refuge of patients without public or private insurance.
It should also be noted, however, that the community health care
centers, which offer primary care in poor neighborhoods, have
continued to be funded even during Republican administrations,
as a safety net that no one wanted to pull away entirely. But
they, too, need more adequate funding.
All of these institutions, as well as the
private insurance companies that insure people under 65 and
offer supplements to Medicare, have a stake in the outcome of
the current Congressional debates about a new health care plan.
So do the citizens who are over 65, and all who expect to pass
that marker in the near or more distant future.
That Looming Debt?
My purpose here is not to solve the
Congressional debate. This latest news about medical costs is
more like a "news handle" for resuming discussion of a broader
issue – that of the future obligations of Social Security and
especially of Medicare. "Deficit hawks" have raised fears that,
as the Baby Boom generation begins drawing on these
entitlements, these funds could go broke, if not sooner then
later. Others point out that the squeeze is building up slowly
and that it could be avoided by making adjustments in retirement
age or removing the "cap" on Social Security taxes ($106,800 in
More broadly, it is pointed out
that deficit spending may be a necessary and productive approach
during a downturn in the economy
unemployment, investing in energy conservation, and developing
the alternative sources of energy that we know we will need.
But the issue is bigger, of course, than
Social Security and Medicare. The deficit hawks are focusing
their attention on the total federal debt, which is now over $12
trillion. When you look further into this, you find that the
federal budget, and thus the national debt, is of two different
(Please note that I am writing this in an
attempt to understand, not as an expert. If my presentation
should be incomplete or inaccurate, I beg your indulgence — and
your suggestions. These are complex matters. It is difficult
to get the whole picture. And even the economists, accountants,
and lawyers vary in the ways they calculate and evaluate them.)
One part consists of what is called
"mandatory" spending, including Social Security and Medicare.
This is drawn from funds held in trust by the federal government
in the form of "special obligation bonds," not Treasury bills
(for the complex details see the official history at
bonds are backed by the "full faith and credit" of the United
States, and thus they do constitute a part of the national debt.
The other is "discretionary" spending,
approved annually by Congress. This is of several different
kinds. The Iraq and Afghanistan wars, for example, are funded by
"supplemental" bills and thus do not appear in the annual
budget. Total military and Homeland Security spending has been
over half of discretionary spending in the past decade. One
summary for FY 2010 puts total "security" expenditures at $844
billion, non-security at $553 billion (http://useconomy.about.com/od/usfederalbudget/p/Discretionary.htm).
The cost of current wars and power-projection throughout the
world may well be the most unsustainable part of our economy.
Discretionary expenditures are funded either
from taxes or from Treasury bills and other such instruments.
There was a balanced budget in 2000. Because of the Bush-era tax
cuts these obligations have accumulated in recent years, leading
to an increased deficit in the annual budget and a rising
The two sets of obligations have been combined
since 1968 in a "unified budget" (it helped make the costs of
the Vietnam War somewhat more palatable by counting Social
Security and other trust funds in the assets column). The total
is now over $12 trillion, though as a percentage of the Gross
Domestic Product it is roughly comparable with past debts. And
of course one part of the mandatory budget is interest on the
federal debt, now over 8 percent and steadily rising.
These are the technical details in broad
outline. If the deficit is a growing problem, what are we to do
about it, and whose recommendations should be followed?
One solution that we have heard for several
years is to appoint a federal commission to examine the total
debt and make the "tough decisions" that Congress has tried to
avoid. The Peterson and Pew Foundations formed a Commission on
Budget Reform which issued its report last December, with the
title Red Ink Rising: A Call to Action to Stem the Mounting
Federal Debt. It does not make specific recommendations;
instead it calls for a multi-decade program to "stabilize" the
debt and save future generations from bankruptcy. Its Conclusion
notes the need to "raise certain taxes" and "reduce certain
benefits." But specifics would be dealt with by the blue-ribbon
President Obama, influenced especially by Wall
Street billionaire Pete Peterson (whose public career began,
ironically, in the Nixon cabinet), has favored this approach to
"fiscal responsibility." He asked Congress to appoint a
commission to deal with the issue, but the Senate voted down one
version of the proposal, the Conrad-Gregg bill, which would have
formed a commission composed chiefly of members of Congress. In
his state-of-the-union address he announced his intention to
appoint a commission anyway, with a membership far broader than
There has not been much coverage of the issue,
other than echoing the alarm about the rising national debt. But
the matter deserves careful reflection.
Opinions about the commission proposal are
varied. Some insist that Congress has the constitutional
responsibility of adopting an annual budget and should not palm
it off on a panel of professionals (most of whom participated in
the debates leading up to the current situation) deliberating in
secret. Others point out that any proposal would still have to
come before Congress, perhaps for an up-or-down vote, perhaps
amendable by some super-majority. Republicans fear that it would
co-opt them in a plan to raise taxes; Democrats, in a plan to
cut entitlements. The official name would probably be "budget
commission," but many commentators are already calling it an
"entitlements commission." Although the commission idea is
attractive because it seems "non-political," it cannot help
being political from first to last.
The Treasury has borrowed from the various
trust funds, chiefly Social Security, over the years — with
interest-free loans, we should note, thus easing the total
national debt. When you check the Internet to see what this "intragovernmental
debt" comes to, it's hard to find the information. The best
source is the official Treasury web site (www.treasurydirect.gov),
which says that the total is now $4.5 trillion. That means that
a third of the national debt is not held "publicly" by investors
of many sorts (individuals who have bought T-bills, pensions
funds, investment banks — and foreign governments, chief among
which is the People's Republic of China), and thus is not
vulnerable to the ups and downs of the international financial
This "intragovernmental debt" is money that
the government "owes itself." And when you are in financial
trouble, the easiest solution may seem to be to write off what
you owe yourself. That idea has been a "subtext" in the recent
discussion of the national debt. So let's ask what would be
William Greider, a seasoned watchdog on many
financial issues, points out that Social Security is far from
Social Security," The Nation, January 25, 2010). It
has a surplus of around $3 trillion ("trillion, not
billion," Greider notes). Because of decreased employment and
smaller paychecks, FICA taxes have shrunk drastically since
mid-2008. The Social
Security Administration says that expenditures may outpace receipts as early as 2018, though
the total fund would not be exhausted for several more
Social Security is a trust fund, paid for by
citizens' FICA taxes. In this sense it belongs not to the
government but to all the participants in this retirement
insurance program. Some of them are drawing on it now. Our
children hope to be drawing on it in the future.
Since politicians love to draw analogies with
a family's budget, this is like having a trust fund for one's
children but borrowing against it — by credit cards — to meet
current expenses. In the case of a legally registered trust,
there is only a limited range for discretion. It's like a
contract, and we love to say that a contract is "sacred."
But there's a difference. The government has
sovereign freedom to change the terms of the trust fund and the
way its debts will be paid. Its relationship to us is more like
those "suzerainty treaties" that we read about in the history of
Israel. Congress could indeed change the Social Security system.
That's why we need to be worried. In order to avoid bankruptcy
in its publicly traded debt, it could put us far down in the
list of priorities.
Probably Social Security has become the target
of the deficit hawks because it is solvent. A more serious
debate concerns Medicare, whose expenditures, according to the
Social Security Administration (see
www.socialsecurity.gov/OACT/TRSUM/index.html), are expected
to begin outrunning assets in 2014. In addition, health care
costs are steadily rising, as my opening "news story" indicates.
That's why there are increasing calls for cost-containment. And
that's why passing a health care bill is so important — and so
controversial, since cost-containment could seriously affect
specialists, medical centers, equipment manufacturers, and
The projections about the future of Medicare
are a motivator to "do something." So is the more general debate
about deficit financing — and about what should be financed. The
basic question, of course, is who would benefit.
In the eyes of many political consultants,
this is largely a question of what will get the votes, and what
kind of financial backing will be needed to get those votes. But
it is also a question of public ethics and what ought to take
priority in our public spending.
The money is there in the economy
or at least was, before it was
frittered away in derivatives, credit default swaps, and all the
other practices that fed the bubble and then the bust.
tax cuts that put billions of dollars of assets into the hands
of the top few percent of the population were "deficit-financed"
through an inverse kind of Keynesianism. However one totals the
amount of the Bush tax cuts (and there is much controversy, if
not obfuscation, about this), this money could have kept
Medicare and other federal expenditures on a sound financial
One problem is that the gain from these tax
cuts is now held as assets, not income.
Instead of being recycled into the economy through spending,
new investment, much is being stashed away, "capitalized," in stocks,
real estate, offshore tax havens -- and, ironically, in Federal
Reserve deposits and government securities, currently regarded
as the safest place to store one's money. While some states tax "wealth," the federal government does
not, except through inheritance taxes and gift taxes
(designed to catch intergenerational transfers prior to
death). The inheritance tax is now technically void,
although everyone expects it to be reenacted (and made
retroactive to the beginning of 2010) as part of a
legislative package. The debate will concern the amount
excluded ($3.5 million? $5 million?) and the rate (a maximum
of 35%? or of 55%?).
Perhaps the chief reason for the current furor over the
national debt is that the Bush-era tax cuts were not
permanent, despite several attempts to make them so.
(The 2001 and 2003 cuts
were made using the now-controversial "reconciliation"
process, without requiring 60 votes for cloture.) They are
scheduled to expire in 2010; then we would revert to the
previous tax provisions. These would add to the tax burden of
middle-class families, as we have been told so often. President Obama has promised that taxes will not be raised on families
with incomes under $250,000. Conservative commentators deride
this, claiming either that it would not collect enough, or that
it would be unjust to the Wall Street traders who deserve all of
their hard-earned wealth, or that it would hurt "small