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The Real Debt Problem: Health Care and Income Inequality

Raising the debt ceiling has traditionally been accomplished through bipartisan agreements where the minority party indulges in some shameless political posturing before ultimately acquiescing. But this year, the House Republicans have turned it into a referendum on the size of the federal government and the overall level of taxation.

Republicans have insisted on dramatic spending cuts, passing a “cut, cap and balance” plan that would cap federal spending at 18% of GDP instead of the current 24% level. The Democrats, meanwhile, have tried to protect entitlement spending and insist on raising current tax rates. And while the parties have debated the proper size of the social safety net since FDR’s “New Deal” structural changes in the American economy over the last 30 years have changed the nature of the debate in a way that neither the political parties nor the public at large have fully internalized. 

Over the last generation, both the cost of health care spending and the level of income inequality have skyrocketed in the United States. These reasons — not the levels of federal taxation and spending — are the two main points underlying the debt crisis, and should therefore be the focus of any solution.

Medicare spending is at the core of the long-term deficit problem. With the rise of medical costs exceeding both inflation and overall economic growth, as well as the increasing number of elderly Baby Boomers who will soon be eligible for the program, Medicare will consume most of the federal budget by the middle of this century if it remains unchecked.

The problem is that Medicare remains exceedingly popular, and the public has repeatedly rejected any future cuts to the program. The cost-control plans Obama put into the 2009 Affordable Care Act have been overwhelmingly opposed by both parties, with the Republicans regaining control of the House in 2010 by attacking Democrats for “cutting Medicare by over half a trillion dollars.” 

Once in power, Republicans passed Paul Ryan’s “Roadmap to Prosperity,” which promised to cut Medicare costs by turning it into a voucher program for those under 55. This year, a Democrat won a special election in an overwhelmingly Republican congressional district by campaigning against Ryan’s Medicare cuts, and Republicans have openly worried that the Democrats now have a “MediScare” plan to regain the House in 2012.

So if cutting health care spending is off the table, the only option left is raising taxes. However, this is where the other side of the problem comes in: The growth in income inequality has left a smaller share of the population paying an increasingly high percentage of taxes. Almost half the population pays no federal income tax at all, breeding resentment among those who do. Thus, on one side, the middle and lower class sees their wages stagnate while the upper class takes a larger percentage of the pie; on the other side, the upper class sees their tax levels rise while the rest of society relinquishes less of their income to the government. 

In the long term, this dynamic is inherently unstable. The bulk of voters in the middle-class are not going to want any Medicare cuts when they see it as the only way they will be able to afford the medical care that will keep them alive as they age. At the same time, the upper class grows increasingly unwilling to support tax increases with a price tag made only for them, and not the broad majority of Americans.

The end-result is a political stalemate that no “Grand Bargain” built around spending cuts and tax hikes will solve. Stopping the growth in Medicare spending and income inequality is the only way to fix the long-term deficit.

Photo CreditWikimedia Commons

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