Macro Challenges Ahead

In yesterday’s New York Times, economics, writer David Leonhardt wrote a provocative column about the macro challenges facing the newly elected Congress. I thought it was good enough to reprint in its entirety. There are lots of topics for a Discussion Board post.

November 8, 2006
Economix
Election’s Over. Now to Tackle the Realities.
By DAVID LEONHARDT

For everyone who is worried about the country’s big economic problems — energy policy, health care, the budget deficit — today is a good day.
It should be a good day regardless of whether you’re elated or disappointed by last night’s results, because a campaign that included almost no serious discussion of these issues has now ended. Today marks the start of the 2008 presidential race.

Unlike midterm elections, presidential races tend to revolve largely around economic plans, be it Bill Clinton’s 1992 promises to the “forgotten middle class” or George W. Bush’s vow in 2000 to cut taxes. As Gene Sperling, a former Clinton adviser, says, “In presidential campaigns, there is a premium on new ideas.”

We could use some fresh economic ideas right now. An honest accounting of the budget deficit would show it to be even larger than the government says it is. High oil prices have helped finance extremist governments across the Middle East, while the five warmest years on record have all occurred in the last decade. Health care costs, like the numbers of the uninsured, keep rising. Wages for most Americans have failed to keep pace with inflation over the last five years.

In some cases, the outlines of a potential — even bipartisan — solution have already begun to take shape outside of Washington. In other cases, the two parties each have a chance to claim a big issue as their own. With an eye toward Nov. 4, 2008, here is a breakdown of the four biggest:

THE DEFICIT When the latest budget numbers came out this summer and they showed a drop in the estimated deficit, I called some former Bush aides — Glenn Hubbard, Greg Mankiw, Doug Holtz-Eakin, Andrew Samwick — to give them a chance to gloat. But not one of them was in the mood.

They all said that the decline was obscuring a much bigger problem: the enormous long-term deficit caused by future Social Security and Medicare payments. “The real big problem is a decades-long generational issue,” Mr. Mankiw said. “That basic challenge often gets forgotten when the short-term situation is getting better.”

Fortunately, imagining a bipartisan agreement on Social Security isn’t all that difficult. Small groups of economists from both parties, including Mr. Samwick, have already negotiated some hypothetical deals.
Republicans might compromise by agreeing to increase the amount of income that is subject to the payroll tax — now $94,200 — and by cutting benefits for high earners. “We have a problem,” Mr. Hubbard says, “and the most well-off among us ought to bear the biggest burden.”
Democrats could then clear the way for an expansion of personal retirement accounts. Even people who hated Mr. Bush’s failed plan for personal accounts should be able to agree that more individual savings would be a good thing.

HEALTH CARE There are two main problems with American health care today, and they tend to get confused. The first is that far too many people don’t have health insurance. If you are not insured through your job, buying a policy is incredibly expensive, because insurers know that the people in the market for a policy are the ones who expect to get sick.
A few states — like Arkansas, Massachusetts and New Mexico, all with ambitious governors — are trying to address this problem by pooling together their uninsured residents into one buying group, much as a company spreads its medical costs across sick and healthy workers. It’s a great idea.

But it won’t solve the second problem: soaring health care costs, which are a much larger part of the long-term deficit than Social Security. Reining in these costs will require cutting back on expensive drugs and procedures that haven’t been proved to make a real difference. This issue is about the toughest one around, and I would be surprised if its political moment had yet arrived. We’ll probably have to wait for health care spending to go even higher.

GLOBAL WARMING Two weeks ago, Sir Nicholas Stern, a top economics official in the British government, released a report that should change the debate over climate change. Sir Nicholas and his staff concluded that without sharp reductions in greenhouse gases, global warming — and the droughts, hurricanes and floods that it brings — will probably reduce the world’s economic output by at least 5 percent a year. “The benefits of strong and early action far outweigh the economic costs of not acting,” the Stern report stated.

In this country, neither political party is serious about the problem. Instead, both have trotted out laundry lists of futuristic alternative-energy programs. No one can know which ones will actually work, and the planet will keep getting hotter in the meantime.

There are only two ways to slow global warming. One is to raise the cost of putting carbon dioxide into the atmosphere, through an energy tax. From Alan Greenspan and Mr. Mankiw on the right to Al Gore and Larry Summers on the left, there is enormous support for this idea, which would do far more to spur research than the current hodgepodge of alternative-energy tax credits.

That said, none of the big advocates of an energy tax are running for office right now. The second idea — less efficient but perhaps more politically palatable — relies on regulations like higher mileage standards for vehicles and limits on carbon use by companies. Senator John McCain says he favors such caps. I suspect we’ll hear more from him in the next couple of years.

LIVING STANDARDS Ben Bernanke, the Federal Reserve chairman, recently noted that sweeping economic changes threatened the livelihoods of many workers, and he warned that rising inequality could set off a political reaction. Henry M. Paulson Jr., Mr. Bush’s Treasury secretary, said that “many Americans simply aren’t feeling the benefits” of the current expansion. Nancy Pelosi, the Democratic leader in the House, puts it this way, “For the first time in generations, parents worry that their children will not be better off than they are.”
So where are the bold new solutions?
Republicans like to talk about education, skipping over the question of how better schools could help struggling workers in their 40s and 50s. Democrats have become fond of trade barriers, which don’t exactly have a good record of lifting a country’s living standards.

I’m not suggesting the answers are easy. But if we can agree that globalization and technological innovation have made the country richer — and they have, enormously — then we should be able to talk about how the winners can do a better job of compensating the losers.

An immigration policy that lets in fewer low-wage workers, but more doctors and scientists, might be a start, notes Benjamin M. Friedman, the author of “The Moral Consequences of Economic Growth.” So might tax cuts for the middle class — paid for by tax increases on the well-off, who have done very nicely of late.

There will, inevitably, be huge fights over the solution to any one of these issues. At times, the fights will get nasty, and people will come forward to decry the lack of civility in American politics. So be it. Economies, like democracies, can thrive without civility. They don’t thrive if they try to ignore their biggest problems forever.

Extra Credit: What is the current amount of the national or public debt of the United States? If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.