What Debt Crisis

Why I Am Not A Deficit Hawk—David Frum

I know I forfeit my membership in respectable society when I say this, but I don't worry very much about the U.S. deficit and the U.S. debt.

For one thing, I figure Mr. Market must know something. If this notoriously querulous personage is willing to lend to the United States for 10 years at 2.2% and for 30 years at 3.3%, then I infer that we are nowhere near the notorious "debt crisis" that is supposedly about to consume the country.

More seriously, the talk of "debt crisis" points us to the wrong question. And as I remember from my days grading university exam papers, it's almost impossible to get the answer right if you get the question wrong.

The United States does not have a "deficit problem." It has an immediate economic underperformance problem (which depresses revenues) and it has a chronic healthcare overpayment problem (healthcare is the most important driver—at this point you could fairly say the only driver—of U.S. federal spending).

Address those two concerns, and you are well on your way to a solution.

Instead, the "deficit hawk" concepts pushes us to do all kinds of other things irrelevant to the problem—and dangerously harmful in themselves.

1) It pushes us to cut defense budgets at exactly the time when a post-9/11 military force will need to rebuild and reinvest, not to mention care for those who bore the battle over the past decade.

2) It pushes us to squeeze income-maintenance programs for the victims of the recession, even as we make agonizingly slow progress toward restoring full employment.

3) It threatens budgets for investment in infrastructure and research, the fundamentals of future prosperity.

4) It wastes Congress' time by bogging that institution down in petty debates over side issues: federal pay freezes, earmarks, etc. The entire federal workforce, civilian and military, could work for free forever without much altering the fiscal outlook.

Conversely, the one great service that "deficit hawks" could do the country somehow never seems to get done—and that is to ignite a debate over tax reform that might yield more revenue while burdening enterprise less.

If deficit hawks promoted energy taxes or a progressive consumption tax with anything like the enthusiasm with which they target earmarks and the defense budget, then yes, they would be rendering a contribution. If the payroll tax were converted into a VAT, we'd support jobs, encourage saving, and remove bureaucratic annoyance from the lives of millions of people.

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But all too often, the answer is no. All too often, deficit hawks fret instead over a $5 million grant to a university in Hawaii, which—for aught any of us know—may possibly even be making good use of the money.

Even when they correctly identify the problem as healthcare, deficit hawks still often do disservice by over-emphasizing program eligibility at the expense of program architecture.

President Obama for example has proposed raising the qualification age for Medicare to 67. And yes, such a move would take a bite out of the deficit projections.

But the real harm in Medicare is the way the program is designed, not the age at which people start. Instead of paying doctors and hospitals annual fees to keep patients well, we pay them for each individual service performed when those individuals get sick. Result: we get a lot of sickness at a lot of cost. Yet debating how Medicare should be designed is considered a different subject from debts and deficits. It is, instead, the very heart and soul of that debate.

Likewise, economic debates—how do we reignite growth and ensure that the proceeds of growth are broadly distributed—are typically segregated from fiscal debates. Yet the immediate fiscal problems of the United States are virtually entirely consequences of the country's lagging economic performance. Perversely, however, the idea has grown up that we must address the fiscal problem first. Some even suggest, utterly perversely, that we can ameliorate the economic problem by addressing the fiscal problem: which seems to me rather like telling people that they can stop the rain by leaving their umbrellas at home.

Let me suggest a different way to think about the budget.

We start first and always with defense: first we set and pay the price of defending the U.S.-led world order.

We worry next about restoring and broadening economic growth, to put more money into the hands of more citizens so that (among other benefits) they can pay more tax. (One evil of concentrating so much wealth in so few hands is that the very rich get very good at defeating attempts to tax them—which is why even the wealthiest of the aristocratic states of pre-modern Europe tended to careen from fiscal crisis to fiscal crisis).

After that, we argue about how to redesign Medicare and Medicaid and whatever emerges from Obamacare, with the goal of delivering adequate health coverage to all Americans at sustainable cost.

Next job: argue about tax reform to raise more revenue in ways that are less burdensome to enterprise and more encouraging of saving and work.

If those things can be done, I'd happily reward every member of Congress with an earmark of his or her very own.