The Unavoidability of Long-Term Austerity

Edmund Andrews surveys the fiscal policy debate and says “If I were king, the plan would allow for another round of stimulus spending but call for real belt-tightening around 2015.” Sure, me too. But one thing that I really think needs to be emphasizes is that the need for medium-term belt-tightening has nothing to do with the argument over short-term stimulus.

By which I mean, whether we make the short-term deficit smaller or larger we still need to tackle a serious longer term problem. And we would still need to tackle that problem even if the recession hadn’t happened. It’s a real problem. And a big one. But the shape of the problem is very simple and it looks like this:

1. The public sector has assumed responsibility for financing the health care of old people.

2. The cost of health care relative to the rest of the economy is rising.

3. The proportion of old people relative to the rest of the population is rising.

This trend bodes ill for our fiscal future. And thinking about solving it is enough to make one’s head hurt. As we saw during the debate over the Affordable Care Act, it’s very difficult to pass measures that reduce the incomes of doctors, the profits of medical device makers, the profits of pharmaceutical firms, or the incomes of hospitals. And yet it’s difficult to see how you could reduce health care without reducing the revenue flows that go to medical professionals and the firms that employ them. It’s a big problem.

But the problem doesn’t get any smaller if we refuse to extend stimulative tax breaks. And the problem doesn’t get any bigger if we think up a public works employment scheme for the long-term jobless.