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BusinessWeek: January 18, 1993 |
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Economic Viewpoint
DAMN THE DEFICIT, GO FOR GROWTH The CBO and OMB both assume that present trends of slow growth and rising health costs will continue throughout the decade. That will lead to sluggish revenues and growing government costs--hence the widening projected deficit. But rather than aiming for more heroic deficit reduction, which would only lead to even slower growth, the new President needs to change those trends. Specifically, he needs to pursue a growth program and plug the drain of health outlays. The preferred macroeconomic policy is stimulus now, best led by public investment, followed by gradual deficit reduction after growth is back on track. The preferred health policy is universal health coverage, combined with cost containment. The new budget estimates only make that logic more imperative. QUICK FIX. The Economic Policy Institute, on whose board I serve, has constructed three scenarios for the 1990s. The first, dubbed Austerity, projects gross domestic product and unemployment given dramatic deficit reduction without increased public investment or health-care reform. Unemployment would remain above 6% throughout the decade, real GDP growth would be around 2% per year, and despite slightly lower real interest rates, private investment would remain slack--i.e., why bother? The deficit would shrink to about $150 billion by 1998, thanks to draconian budget cuts or tax increases, but would then rise again because of chronic slow growth. A second scenario, dubbed Muddle-through, continues the present trend. This yields slightly higher growth, but an even worse deficit, with escalating federal interest costs. The better course is to use a jolt of public investment--at least $60 billion a year for the next 18 months, followed by $40 billion a year after 1994, to stimulate and rebuild the economy. Real deficit reduction relative to GDP would kick in after 1995, thanks to the higher real growth rate and health-care reform. By decade's end, the economy would enjoy higher real output and a steadily diminishing deficit. The new Administration should be debating not which programs to slash but how best to get higher growth. Tax incentives were tried and found wanting during the 1980s. The better approach is to use public infrastructure to bridge over the failure of private industry to invest in a deflated economy. When growth is restored, private investment will come back because investors will see customers. This strategy also requires a low-inflation, low-interest-rate compact with the Federal Reserve. Such a compact is attainable if the Fed sees a convincing long-term plan for steady growth and gradual deficit reduction. HEALTH-CARE DIVIDEND. The other essential ingredient to budget discipline is health-care reform. The Clinton transition team is currently debating the details of an imaginative strategy that blends universal coverage, cost containment, and managed competition. The basic idea is to require all employers to contribute to a health-care system that would use regional Health Insurance Purchasing Co-operatives (HIPCs) as single payers. The HIPCs would not reimburse, procedure by procedure, but would pay a flat annual fee to local health plans based on their enrollment. Consumers would have a free choice of health plans and would not have to change plans when they changed jobs. Costs would be shared among businesses and employees, with the government paying on behalf of the unemployed. Nearly everyone, however, would be in the same basic system. Large companies would probably retain the right to operate separate health plans, but most would soon find it more cost-effective to pay into the common fund on behalf of their employees. If this plan is enacted in 1993, it could produce net budget savings as early as 1995. The government would need to contribute an additional $50 billion to $100 billion yearly, but that could be offset by limiting the employer tax-deductibility of health contributions, which currently costs the Treasury some $72 billion a year. Federal outlays for medicaid, the most rapidly rising share of the budget, would be added to the pot. By 1995, the system would begin reaping real budget savings from the cost discipline and greater administrative efficiency of the new system. None of this potential for deficit reduction via health reform is reflected in the CBO and OMB estimates. The choice is Clinton's. He can act to tighten everyone's belt. Or he can aim for a high-growth economy and reform the health system, which together would yield a far more attractive path to budget discipline. The 1992 election was about economic stupidity. If the economy is still in a stupor in 1994 and 1996, it will be hard to blame on others. | |
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