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The Debt Crisis Road To Social Democracy

So it looks like everyone has all their cards out on the table for their preferred avoiding-a-debt-crisis plan.  We conservatives have the Ryan Roadmap.  Liberals have the Schakowsky Plan and the liberal think tank plan.  I think that the very best that we conservatives can reasonably hope for given our politics is some combination of the Simpson-Bowles final report (yes even the tax increases and defense cuts) and the Ryan-Rivlin health care plan.  The tax increases and defense cuts in the Simpson-Bowles plan might upset some conservatives, but they can comfort themselves with the knowledge that if we don't change the trajectory of our politics, Simpson-Bowles will seem like a lost golden dream.

I start off with the assumption that neither side in the debate will end up with exactly what they want.  Conservatives will end up with higher taxes than in the Roadmap and liberals will get less federal spending than in the Schakowsky Plan.  Victory will be determined by where along the continuum we end up.  I think that liberals are well positioned to structure our political choices in a way that we end up far closer to a Schakowsky-type outcome than a Ryan-type outcome.  I think a lot of this comes down to the politics of emergency.

Reihan Salam wrote that the passage of Obamacare shifted the status quo in a structurally center-left direction.  I think that with Obamacare, a Greece-type fiscal crisis would most likely tend to shift our politics (unless the timing of who holds power is just right) into a social democratic direction.  If we are approaching a sovereign default, some drastic changes will be easier to implement in the short-term than others.  As commenter Art Deco has often told us, you can only cut entitlement spending on the old and infirm very very slowly.  The quickest way to get the budget under control would be some combination of huge tax increases, sudden (and almost certainly poorly thought out) defense cuts, and a huge cut in the medical inflation rate - almost certainly as part of a full government takeover of medicine.  You would also get some policies that conservatives would support like sharp cuts in federal domestic discretionary spending, cuts in the compensation and numbers of federal civilian employees, and maybe even the long dreamt about banning of earmarks.  The result of this kind of emergency budget balancing program would be a social democratic structure with a Tea Party paint job.

A look at the health care issue might show why liberals would, if current policy circumstances continue basically unchanged, have a huge edge in the politics of a debt crisis.  If the experience of Massachusetts is anything to go by, Obamacare will make private health insurance even less affordable than at present while increasing the number of people with government health insurance.  If a debt crisis hits, the choice will be either to sharply cut government benefits (to the old, to those on Medicare, and to those who will be receiving government subsidies on the forthcoming health care exchanges) without measures to slow medical inflation, to move in a free market-oriented direction or to go to a regime of price controls followed by the implementation of a single-payer system.  

The first would have no particular constituency.  Free market-oriented reform might make sense as policy, but it won't be implemented under the conditions of a decaying Obamacare plus a debt crisis.  You might be able to slow the rate of medical inflation through reforms that change consumer behavior (like Mitch Daniels did in Indiana) and that encourage provider reorganizations (of the kinds that David Goldhill suggested) that save money and improve service, but you can't get it all at once, all across the system, under crisis conditions and as a way to realize quick savings.  Even if you could produce such a system for the whole country on the fly (and who can picture Congress doing any such thing?), the public would never allow it.  It would mean destroying the system of employer-provided health insurance, and transforming Medicare and Medicaid under conditions of a general economic panic.  Good luck with that.  Realizing savings through a full government takeover and government rationing of medical care would seem like a more intuitive and equitable way to deal with sharing sudden scarcity. The same dynamic would play out in a sudden (as in emergency) fight between tax increases and entitlement reforms.

Time is not on the side of conservatives and smart, strategic-minded and not especially honest liberals like Matthew Yglesias and President Obama seem to realize it.  I suspect that is why Yglesias would prefer tto wait until the economy has recovered to his satisfaction before implementing debt-reducing reforms (even ones that would not reduce government spending in the short and medium-term - like cutting benefits for higher earning retirees and raising the retirement age for those who retire in future decades.)  I suspect that is why Obama plays down the Social Security shortfall by speaking of tweaks and modest adjustments.  I don't think that either Obama or Yglesias actually want a debt crisis, but I also think they like their side's chances in the event of one. 

That is why it is especially important for conservatives to start winning their political and policy fights right now and especially in the realm of health care.  The best way to move toward the Ryan-Rivlin plan and to prevent the full government takeover of health care is to change facts on the ground in ways that slow medical inflation and create a large enough class of Americans with consumer-driven health care policies that a full government takeover of health care becomes a political impossibility.  Market-oriented health care policies will have to come from the outside-in as governors and state legislatures pass laws to increase the number of Americans with consumer-driven health care policies ( Iwould start with Medicaid clients and state and municipal workers) and as Republicans in Congress push to give the states more space to experiment.  If Indiana-style HSA/Catastrophic coverage plans save the government money, you might even find new allies as Democratic mayors come out in favor of such policies as a way to slow down the spiraling employee health care costs that many municipalities face.  If we can do this, we might be in a better position to win the politics of a debt crisis.  Even better, if we can show that conservative reforms can save money and maintain public living standards, we might earn enough public trust to implement policies that avoid a debt crisis altogether.      

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