Economics

What are the costs and trade-offs of budget-related public policy decisions? In this section of the Understanding Fiscal Responsibility curriculum, students use economic decision-making concepts and skills to ask pointed questions about such public policy dilemmas as the costs and benefits of ensuring income security to Social Security recipients, guaranteeing health care to the elderly, and getting good value from money spent on national security. They learn that the range of public policy options under consideration often reflect differing values and priorities as much as they reflect different economic analyses and that conflicting claims can be evaluated using economic methods and data. This section contains the following lessons:

Social Security and the National Debt

ESSENTIAL DILEMMA:

  • What costs and trade-offs are we willing to accept to ensure the benefits of income security to Social Security recipients?

INTRODUCTION:

  • A bedrock of the social contract as envisioned in the New Deal
  • A redistributionist Ponzi scheme that perpetuates fraud on the American public and silently ushers in a collectivist, socialist mentality
  • A looming budgetary disaster that nobody wants to talk about—the third rail of politics
  • The basis of the modern social welfare state that is fundamentally sustainable and must be preserved

Social Security, the largest program of the federal government, can be all of these things to different people. Why is it so important and so popular, and yet so controversial? What is it, what does it intend to do, and does it successfully achieve that goal? Is it really in jeopardy? What are its real costs and benefits, and what changes are necessary to ensure its sustainability?

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Medicare and the National Debt

ESSENTIAL DILEMMA:

Can we guarantee quality health care to the elderly in a way that is both efficient and equitable?

INTRODUCTION:

Don’t ever argue with me [about health]. I’ll go a hundred million or billion on health or education. I don’t argue about that any more than I argue about Lady Bird [Mrs. Johnson] buying flour. You got to have flour and coffee in your house. Education and health. I’ll spend the goddamn money. I may cut back some tanks. But not on health.

-Lyndon B. Johnson, 1965 (New York Times, 2009)

In this lesson, students will re-ask the question President Johnson answered for himself over 45 years ago: How high a value do we place on guaranteeing quality health care to the elderly? This lesson is about Medicare, the country’s health insurance program for people age 65 or older, and the level of quality of the care we wish to maintain for the elderly. That question cannot, however, be understood without looking more broadly at quality and cost in U.S. health care. Health care in the United States in not nearly the most effective in the world in life expectancy, with an average of 78.37 years (Central Intelligence Agency [CIA], 2011b). The United States also has the 46th best infant mortality rate in the world, with 6.06 infant mortalities for every 1,000 live births (CIA, 2011a).

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The Economics of National Security

ESSENTIAL DILEMMA

How do we know if we are getting good value out of the money we spend on defense?

INTRODUCTION

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

—President Dwight Eisenhower, “Cross of Iron” speech, April 16, 1953 (Information Clearing House, n.d.)

The defense budget is not a pot of gold. We cannot fix the deficit or fund all of our domestic priorities simply with the response of, take it out of defense. Dismantling our military will not solve our domestic problem, but it will destroy our ability to protect our interest and to shape the direction of world events. To cut defense, we have to do it right, [like] a sweeping restructuring of our armed forces that will reduce defense spending while still preserving the military capabilities we need.

—Vice President Richard Cheney, speech at Lawrence Technical University, September 14, 1992 (OnTheIssues, 2011)

Deciding how much to spend on national defense is not easy. It is not, for example, like deciding how many cars to build if you are General Motors. Like national parks, clean air and water, and lighthouses, it is something the federal government provides. National defense is a public service—a public good. By its very definition, a public good or service is available to all, even those who don’t directly benefit. The private sector does not offer public goods or services such as parks or clean water because these services are open to all—even those who don’t or can’t pay for them—so they are not a profitable investment. A government-provided public good or service cannot be evaluated based on its profitability, so the political process must determine how many parks to create and maintain, how clean the air should be, and how adequate the nation’s security systems are. Many believe this process is less “rational” than decisions made by the free market because there are no independent data, such as sales figures, to confirm that they are a good value and a good use of the resources they require.

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Taxation and the National Debt

ESSENTIAL DILEMMA

Is there a fair and efficient way to fund and maintain the public services we want?

INTRODUCTION

In this world nothing can be said to be certain, except death and taxes.

—Benjamin Franklin, 1789 (Martin, 2012)

I, _______________, pledge to the taxpayers of the ___ district of the state of ____, and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

—U.S. House Taxpayer Protection Pledge (Americans for Tax Reform, n.d.)

Here’s the truth: The only way America can reduce the long-term budget deficit, maintain vital services, protect Social Security and Medicare, invest more in education and infrastructure, and not raise taxes on the working middle class is by raising taxes on the super rich.

—Former Secretary of Labor Robert Reich (2011)

Public services must be paid for with taxes. The pledge that the Americans for Tax Reform have asked members of Congress to sign exacts an absolute promise not to vote to raise taxes of any kind, including the marginal tax rate. The marginal tax rate can be used to compel wealthy people to pay a higher proportion of their income than middle income or poor people pay. Robert Reich argues, in contrast, that firm caps on taxes, especially for the wealthy who are most able to pay, have significant opportunity costs in the form of reduced government services, increased taxes on the middle and working class, or increased deficits.

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Balancing the Federal Budget

ESSENTIAL DILEMMA

When, if ever, should the nation prioritize balancing the federal budget?

INTRODUCTION

Government spending must stop growing. The government, like every Hoosier [Indiana]
household, must be required to balance its checkbook and stop living on a credit card.

—Congressman Todd Rokita (2012)

National income will be greater tomorrow than it is today because Government has had the
courage to borrow idle capital and put it and idle labor to work. . . . Our national debt after
all is an internal debt owed not only by the Nation but to the Nation. If our children have to
pay interest on it they will pay that interest to themselves. A reasonable internal debt will not
impoverish our children or put the Nation into bankruptcy.

—President Franklin D. Roosevelt, May 22, 1939 (Peters & Woolley, n.d.)

I have long argued that paying down the national debt is beneficial for the economy: it keeps
interest rates lower than they otherwise would be and frees savings to finance increases in the
capital stock, thereby boosting productivity and real incomes.

—Federal Reserve Board Chairman Alan Greenspan, April 27, 2001 (Federal Reserve Board, 2001)

On September 4, 2011, the Gainesville, Florida, Tea Party launched an Internet meme by claiming to simplify the Congressional debate over raising the debt ceiling. They claimed that simply removing 8 zeroes from the federal government’s expenditures, revenues, deficit, outstanding debt, and proposed budget cuts would facilitate easy comparison to a household budget, and reveal a shocking lack of discipline and foresight on the part of policymakers (Newsom, 2011).

How valid is this comparison? On the one hand, a comparison between the management of a household budget and management of the federal budget is tempting. It is a rhetorical device that pundits and politicians use when they are advocating fiscal restraint because it is a frame of reference voters will understand. On the other hand, the analogy breaks down in at least one important way. Whereas households must borrow money from unforgiving, outside sources (banks, for example), the government has more flexibility because much of what it borrows, it borrows from itself. In fact, economists argue that some level of debt can be good for the economy, particularly if the money borrowed finances investments in future productivity. Traditional economists believe the government should not play a role in stimulating the economy, but those who accept the theories of economist John Maynard Keynes believe that using borrowed money for short term deficit spending can help to stimulate the economy when it is not doing well.

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