Wednesday, July 13, 2011

5 Things Intergenerational Advocates Should Know About the National Debt and Deficit

The ongoing debate surrounding the national debt and deficit can be confusing, especially when it comes to discerning facts from misleading political rhetoric. Generations United has identified five key points related to the national deficit that our members should know about in order to be well informed on this very important issue;

1. The national debt itself is not a measure of financial impact across generations.

What is important is how the debt affects the economy at the time when the government borrows the money. Whether or not the national debt will be detrimental to future generations is determined by the quality of the society that we pass on. If the debt is increased by positive investments (such as education and health care) we ensure a healthier workforce and the future economy will benefit as a result.

2. During periods of economic weakness, deficit spending actually can grow the economy.

While a deficit can in principle lead to higher interest rates and lower productivity when the economy is functioning near capacity, it actually can help bolster the economy during a downturn. The primary issue during a recession is a lack of demand. Government spending and/or tax cuts at that time can increase demand as well as output and employment. Higher output means that companies will invest more and that future generations will be made wealthier as a result.

3. The majority of the forecasted budget deficit problem is caused by high and rising costs in the private healthcare sector.

The federal government pays out over half of the country’s total health care costs via Medicare, Medicaid, and other related programs. Most of that money goes to the private health care sector. The cost of this care in the coming years is projected to rise far more rapidly than our current rate of economic growth. If we can find a way to control the increasing cost of health care, then the budget deficit will become much more manageable.

The Patient Protection and Affordable Care Act (ACA) signed into law by President Obama on March 23, 2010 takes significant steps to reduce the increasing cost of health care by ensuring that all Americans have access to preventative care services and affordable coverage. By creating incentives to treat health care issues earlier and in primary care facilities, rather than costly emergency rooms, the ACA will reduce health care costs considerably over time; most of these changes will occur beginning in 2014, with the introduction of state-based “exchanges,” marketplaces where consumers and small business owners can purchase affordable health insurance, much like shopping online for a plane ticket or a hotel room. According to a recent study by the Robert Wood Johnson Foundation, state governments will spend at least $90 billion less from 2014 to 2019 because of the ACA’s reforms.

4. Social Security has its own funding stream, and it will be fully funded until 2036.

Some people have suggested fixing the deficit by cutting into Social Security. In reality, Social Security did not contribute to the deficit, and it should not be cut to reduce a deficit it did not cause. Because Social Security operates from a dedicated self-funding stream, it is projected to be fully solvent until 2036.

Much of the current debate around the national deficit has focused on the idea of cutting into Social Security to help alleviate the current and projected budgetary shortfalls. Generations United strongly opposes that course of action. It makes little sense to cut benefits from a program that has proven itself to be self-sustaining, especially a program like Social Security that is so valuable to all generations. Furthermore, the amount of the deficit that could be reduced by cutting into Social Security pales in comparison to the amount of the deficit that could be reduced by letting the tax cuts of the early 2000s expire or reducing the spending allocated to conflicts overseas and addressing the rising private health care costs.

5. A constitutional balanced budget amendment means cuts to critical programs.

A balanced budget amendment to the U.S. Constitution would threaten our economic security while raising a host of problems for the operation of Social Security and other vital federal functions. Requiring a balanced budget every year, no matter the state of the economy, would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. That’s because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the exact opposite of what good economic policy would advise.

Generations United hopes that these five key points have answered some of the questions that our members may have had concerning the national debt and deficit.

For more information on these issues, please visit the following sites:

Center on Budget and Policy Priorities
Center for Economic and Policy Research

This article is the first installment in Generations United’s Budget Blog Series.


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Anonymous said...

How many people could benefit if the billions spent on the interest was put back into the people? Deficits and debt will hurt the very people you wish to help because of the rising interest on borrowed money. Deficits and debt are killers for all people in this country.