The hidden truth about the deficit

What nobody wants to say: the real looming deficit problems are medical. Health costs must be controlled. The rest is peanuts.

Rarely before in American history has there been more disconnect between Washington and the rest of the nation. Washington is obsessing about the projected federal budget deficit. Everyone else in America is worried about jobs.

To get jobs back we’ll need more federal spending, not less — at least over the next few years. Consumers can’t and won’t spend, banks can’t and won’t lend, big companies won’t invest in new capacity, and state and local governments are broke. Unless the federal government fills the gap we’ll continue to suffer near double-digit unemployment and slow growth.

Don’t get me wrong. The projected federal budget deficit will be a problem eventually. So it’s prudent to take steps so the federal government doesn’t go broke in the future.

But the President’s deficit commission is all over the map.

Let’s be clear about the long-term deficit problem.

It’s not Social Security. Social Security’s shortfall is modest. It arises because so much income has gone to top earners in recent years that the payroll tax covers a smaller percentage of overall income than was planned for. I should know. I used to be a trustee of the Social Security trust fund.

The obvious answer is to lift the cap on income subject to Social Security payroll taxes, now $106,800, to about $150,000.

Nor is the real problem Medicare. It’s what lies behind Medicare’s projected growth: the explosive growth in medical costs.

Attempts to cap Medicare without dealing with the underlying problem of soaring medical costs — as the deficit commission recommends — will cause a firestorm. Sarah Palin’s “death panel” scare was nothing compared to what will happen if Medicare payments are capped yet the underlying drivers of health-care costs aren’t addressed.

Over the next three decades, drug costs are projected to soar. New medical equipment, diagnostic tests, and complex procedures will rise into the stratosphere.

The answer is to finish the job of reforming health care. How? Let Medicare use its bargaining leverage to get low-cost drugs and supplies. End health insurer’s immunity from antitrust laws. Allow the public to buy health insurance from a Medicare-like public option. And award plans that focus on disease prevention rather than expensive diagnostics and procedures.

Everything else the deficit commission recommends is peanuts compared to taming health-care costs.

By the way: In Washington’s zest to cut the budget deficit, let’s not shoot ourselves in the feet. In coming years the nation should be spending more, not less, on education, infrastructure, and basic research. These are critical to our future economic growth.

Without growth, the deficit will become an even larger share of the total economy. And then we’re really in trouble.

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