The global economic crisis has brought the national debt to the forefront of the public consciousness, according to Massachusetts Institute of Technology economics professor James Poterba. The recession and accompanying stimulus bill have pushed the annual deficit to a record-high peacetime level. The deficit rose from 12 percent of U.S. gross domestic product in 2007 to 12 to 13 percent of the GDP in 2009, he said.
"Projections of debt levels for the 2020s have now accelerated to the mid 2010s," he said.
Poterba is also the president of the National Bureau of Economic Research.
In order to balance the rapidly growing deficit, Poterba said, we must examine our country's tax policy.
Raising taxes could reduce the United States' deficit, but at the same time, such a move could seriously distort the economy, he said, particularly if tax rates are increased the most for wealthy individuals.
One way to avoid these distortions is to broaden the tax base by reducing tax deductions. When members of the President Advisory Panel on Federal Tax Reform proposed this plan to Congress, however, they faced widespread opposition, according to Poterba, who served on the panel. Even as the deficit has become an important issue for the American public, Poterba said, raising taxes has not.
"There is no tremendous political appetite for any type of taxes," he said.
After the current economic crisis passes, increased entitlement spending will become the principle force driving increases in the nation's long-term debt, all panelists agreed. The Social Security Trust Fund is quickly running out of money, and in order to pay for all benefits promised, the government would need to increase the payroll tax rate by an additional 3.4 percent, said Andrew Samwick, Dartmouth economics professor and director of the Rockefeller Center.
The Social Security deficits are driven primarily by the aging of the American public, he said, which affects the ratio of dependents to workers. Currently, there are 30 Social Security dependents for every 100 workers, but this will soon rise to rise to 50 dependents for every 100 workers
Medicare presents a far greater problem for the country's national debt than does Social Security, according to Dartmouth economics professor Jonathan Skinner.
Medicare deficits will eventually swamp the Social Security deficits, he said.
The problem with Medicare, Skinner said, lies with the increased growth of health care spending, which is difficult to fix.
"Director of the Congressional Budget Office Doug Holtz-Eakin used to say Social Security is Grenada and Medicare is Vietnam," Skinner said.
Several potential health care reforms have come out of Congress and the executive branch, Skinner said, including reducing malpractice lawsuits, increasing health care information technology and expanding hospital quality programs. Such programs have been projected to save several billion dollars, but the budget deficit hospitals are facing falls somewhere between $600 billion and $1 trillion, Skinner said.
The only way to reign in the costs of Medicare is to examine regional differences in health care delivery, according to Skinner. Many areas have disparate health care costs, he said, citing San Francisco and east Long Island, which had identical health care costs years ago. San Francisco's costs grew more slowly, resulting in a current difference of $1 billion in health care costs between the two regions. If health care spending were to grow as it has in San Francisco, Skinner said, Medicare's $600-billion deficit would turn into a $600-billion surplus.
Skinner suggested several ways for the government to reduce health care costs, including lowering the reimbursement rate for high-cost health care regions and organizing hospitals and associated doctors into accountable care organizations which would be rewarded for reducing their costs.
