Why Should Anybody Care About the Debt, Anyway?

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If we have a jobs crisis, why are we talking about how to cut support for poor people's energy bills and summer classes?

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Progressives are infuriated with the president's 2012 budget and the rise of the deficit hawks in Congress. We don't have a deficit crisis today, they note. We have a jobs crisis, and yet we're talking about how to cut support for poor people's energy bills and summer classes. Isn't this insane?

No, I don't think the discussion is insane. But I do think it's unfortunate that the pols and the press haven't adequately explained what a debt crisis is and why we should care about it. Here's my best shot at breaking down the discussion into three simple questions:

1) What is a debt crisis, anyway?

2) Does deficit reduction have to hurt the poor?

3) If everybody agrees that the long-term deficit crisis is a health care crisis, why are we talking about cutting discretionary spending and Social Security?

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WHAT IS A DEBT CRISIS, ANYWAY?

Americans don't save enough to lend the government everything it needs to finance high deficits forever. As a result, the government has to borrow from other countries and pay them back with interest. Those countries expect to be paid back in full and on time. If investors doubt a nation's ability to pay back its debt, they will demand higher interest rates (look at Europe today). As borrowing costs for government increase, that cost trickles down into the average American's life, making it more expensive for families to buy homes or for companies to buy new equipment.

To squash a debt crisis, the U.S. government would have to build confidence among our investors. Confidence here isn't a wishy washy word. It's a real concept. We would have to prove to investors that they can trust us enough to lend us money with little risk.

How would we build confidence? There are two ways, really. First, the government can spend less money and send it overseas. Second, we can tax higher and send that revenue overseas. The first strategy would almost certainly cut domestic programs that disproportionately help the needy. The second could require rapid escalation of tax rates that could hurt growth.

There is a third option: The Federal Reserve could print money to avoid cutting spending or raising taxes. But more money in circulation in a churning economy would fuel inflation, raising the price of everything from grocery items to mortgages to small business loans.

The upshot: Imagine a scenario where your family faced higher prices for all goods, combined with higher taxes on your income, combined with fewer services for your parents and children, and you begin to understand what a debt crisis could feel like.

[Donald Marron has a great, deeper explanation here.]

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DOES DEFICIT REDUCTION HAVE TO HURT THE POOR?

No. In fact, you could fairly say the deficit reduction is about protecting the poor. Nobody is talking about cutting Social Security for the poorest Americans. Even Rep. Paul Ryan, whose budget plan could be called draconian, included a new minimum benefit in Social Security to ensure that low-income Americans get more from the program than they're currently promised.

What's more, the rationale of acting quickly and gradually is that a debt shock could require the country to make steep cuts or tax increases that would overwhelmingly hurt the poor. After all, low-income Americans rely much more on government spending than the wealthy. Twenty percent of the budget goes to helping the old, poor and sick with their health insurance. That's Medicare and Medicaid. Another twenty percent goes to helping the retired, the disabled, and the widowed pay for essentials. That's Social Security. Hundreds of billions more go to "income insurance" programs like the Earned Income Tax Credit and food stamps, which exclusively benefit the lower and lower-middle classes.

The upshot: Steep cuts to domestic spending means steep cuts to spending programs that benefit the poor. We can cut now and wisely on our own terms, or cut steeply on somebody else's terms.

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WHAT DOES DISCRETIONARY SPENDING HAVE TO DO WITH ANYTHING?

Thumbnail image for Thumbnail image for Thumbnail image for 570 socialsecuritymedicare.pngThe graph above tells a clear story: The long-term budget crisis is almost entirely a health care crisis. So why is Congress talking about making cuts to "non-security discretionary spending" and Social Security? Why not simply reform Medicare?

The short answer is: There is no way to "simply reform Medicare," a fee-for-service program that is growing out of control because the cost of health services are growing twice as fast as inflation. To reform Medicare you have to reform the roots of a multi-trillion medical industry that touches every American and stretches from R&D pharma policy to end-of-life consultation.

The U.S. doesn't have the luxury of waiting and praying that our investors never lose faith in our credit, even as we approach historically dangerous levels of debt. The only solution -- even if you prefer to think of it as insurance against the unlikely possibility of a debt crisis -- is to make savings where we know how to save. We know how to raise income taxes. We know how to cut defense spending and gas subsidies. We know how to change Social Security formulas. We don't know how to stop health care inflation.

The upshot: The same way every weight loss plan begins with actionable steps to improve diet and exercise, a smart deficit reduction plan should begin with doable cuts to bring the budget into line before we make the hard choices on Medicare and Medicaid.
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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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