Timothy J. Bartik
Senior Economist
W.E. Upjohn Institute for Employment Research

Marissa Zamudio
Early Childhood Investment Corporation, Diversity Specialist 

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Posted on July 29, 2011 by timbartik

What is really the issue with the national debt? The real issue is not the short-run deficit. The deficit should be high right now to deal with the needs caused by the recession, and to stimulate the economy. The problem is the long-run deficit.

The key problem with the long-run deficit is health care spending.  Unless we figure out how we will deal with growing government spending on health care relative to the size of our economy, we will have a severe long-run deficit problem and debt problem.

Any good solution to this long-run deficit problem requires: (1) some type of controls over health care costs and some priority setting in health care spending; (2) some good long-run source of relatively economically efficient tax support for health care spending, such as a national value-added tax, as even with good health care policy, we are likely to want to spend more on needed health care; (3) making sure we free up money for high-quality investments that will increase economic growth.

As Ezra Klein and Ethan Pollack have recently pointed out, most of the current budget cut proposals focus on cutting the domestic non-security related discretionary federal budget. Over one-half of this so-called “discretionary” budget is investment in infrastructure, education and research, and over one-sixth is in education, child care, job training, and other human capital related investments.  These cuts don’t make sense because these investment funds, if they are well-spent, can increase the size of the economy, which makes it easier to afford to meet our many national needs, including health care, and to deal with our forecast debt burden.

We already see in recent state and local budget trends that state and local governments, squeezed by the elimination of federal fiscal stimulus funds, along with rising health care costs and the continued recession, have significantly cut back on education. These cut backs in education spending have the potential for adversely affecting both short-run job growth and long-run economic growth. For example, a recent analysis by Lucy Dadayan and Robert Ward of the Nelson Rockefeller Institute of Government at SUNY-Albany shows that local government education employment is down 231,000 jobs since its peak in September 2008.

The big long-run issue facing the U.S. is whether we can figure out policies that will allow us to make high-return investments at a sufficient scale to boost U.S. economic growth rates in per capita income.  These high-return investments include but are not limited to high-quality early childhood programs. This will require us to deal with our fiscal problems by creatively dealing with health care policy, and by squarely facing up to the need for efficient sources of future revenue for health care. Otherwise, health care costs in the government sector will put a squeeze on everything else government does, and health care costs in the private sector will put a squeeze on private sector real wages, which will make it more difficult to afford to meet many of our national needs, including our national need for better child development.

Substituting an “investment deficit” for a “federal budget deficit” makes no sense as a long-run strategy.

Timothy J. Bartik is a senior economist at the W.E. Upjohn Institute for Employment Research. His "Investing in Kids" blog, originally published at http://investinginkids.net/ appears here by permission.