Robert Reich: Create Demand First, Cut the Deficit Next

Last Updated Nov 19, 2010 10:50 AM EST

If anything positive can be said about the financial crisis and
the subsequent political fallout, it is this: It launched a national
conversation about the fact that for most of modern history, our government has
been spending more money than it takes in. This month, we heard from href="http://moneywatch.bnet.com/economic-news/blog/daily-money/deficit-reduction-proposals-what-they-could-mean-for-you/1567">two
commissions that looked at different ways to correct this imbalance. They
have launched a long, difficult examination of our national priorities,
reminding us that we can't solve this problem without both higher
taxes and fewer government benefits. We sought out two perspectives on how to
balance the taxing and the spending. Here, Robert Reich, a Berkeley professor
and the Secretary of Labor under President Clinton, offers his thoughts on the
ideas under consideration by the href="http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-simpson-bowles-deficit-reduction-plan/990">Simpson-Bowles panel. (In a separate post on BNET, we also spoke with href="http://www.bnet.com/blog/business-decision/do-republicans-want-to-cut-the-deficit-rep-paul-ryan-does/562">Rep.
Paul Ryan of Wisconsin.)


What’s your reaction to the deficit-cutting ideas
from the Simpson-Bowles panel?


Reich

It’s a hodge podge — some are good —I
think raising the threshold on income subject to social security taxes is a
positive step. Some strike me as wrong-headed — such as raising the
age of eligibility for collecting Social Security because many people who work
with their bodies, laborers, won’t be able to manage that. I think it
makes sense to have an honest discussion about cutting national defense, and I
think we have to get control over spending obviously, but we need a fair
balance between tax increases and tax cuts. I don’t think the report
goes far enough to emphasize the core reasons for the long-term deficit —
soaring health care costs and baby boomers whose bodies are all starting to
erode together over the next few years. That’s explosive, and it’s
a huge part of the problem.



So what steps should the government take?


We have to get control over rising healthcare costs. There
are a number of ways: Government can use bargaining leverage, given the huge
size of Medicare and Medicaid, to get lower drug costs. We can buy
pharmaceuticals from Canada. We need to emphasize disease prevention —
particularly for heart disease, diabetes — these are huge
expenditures. We need to create financial incentives for businesses who buy
insurance from carriers to only focus on the most effective treatments —
and not to use treatments that have been very proven expensive but ineffective.

Do you think any of those changes are politically possible?


I think they’re necessary. This year, I don’t
know what’s going to happen — given the new Congress and
the venom in the air. [But] the soaring health care costs are being shifted
onto individuals and families at a very rapid rate. Co-payments, deductibles,
and premiums are going through the roof. The public is going to demand that
these costs be controlled.


As for the Simpson-Bowles proposals, I don’t
want to say they’re dead on arrival, I think they will commence an
important public conversation, but it’s an odd conversation to have
right now because the biggest economic problem we face is not the deficit, it’s
the lack of demand. If consumers won’t buy, and businesses won’t
expand because there are not enough consumers — and if exports are
not growing because other countries are embarking upon austerity measures —
where do you think demand is going to come from if not from government spending
and tax cutting? You don’t have to be a rocket scientist to see taxes
are going to have to be cut and spending is going to have to be increased in
the short term just to get the economy moving even slightly.


The deficit is not the underlying problem — it’s
the lack of demand. Most business people will tell you that their biggest fear
is that there are not going to be enough consumers.

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