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Cap-and-Punt Is the Wrong Way to Cut Future Deficits

Author: Peter R. Orszag, Adjunct Senior Fellow
May 30, 2012
Bloomberg.com

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Bracing for more economic shocks from Europe, the U.S. urgently needs a barbell fiscal policy. That is, more immediate stimulus and more deficit reduction that is designed to take effect over time.

Unfortunately, policy makers are failing on both sides, mostly ignoring the need for additional stimulus while also becoming enthralled with the wrong kind of future deficit reduction.

As I pointed out in last week's column, history shows we are capable of setting deficit reduction for the future and sticking to it -- as long as the delayed measures are specific and gradual. But it is also possible to set up future budget cuts that have little chance of actually happening and therefore lack credibility.

A good illustration of how to do future deficit reduction the wrong way is the Sustainable Growth Rate formula for Medicare, which was enacted in 1997 to constrain payments to doctors. The SGR places a broad cap on payments without addressing any of the reasons those payments are increasing. If the cap is exceeded, payments are supposed to be simply cut across the board.

It's much easier to slap a cap on spending than to get into the weeds of making policy changes to constrain that spending. It generally doesn't work, though. Not surprisingly, Congress has repeatedly waived the SGR cap by legislating "doc fixes," temporary patches that cancel the scheduled payment reductions. Although these interventions have not fully restored physician payments to what they would have been, the SGR has had much less effect than if it had been fully implemented.

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