Wall Street Sharks Have Lost Everything, and Now They're Coming After Us

With the enactment of a large economic stimulus package, fiscal conservatives are using the temporary deficit increase to attack a perennial target -- Social Security and Medicare. The private-equity investor Peter G. Peterson, who launched a billion-dollar foundation last year to warn that America faces $56.4 trillion in "unfunded liabilities," is a case in point. Supposedly, these costs will depress economic growth and crowd out other needed outlays, such as investments in the young. The remedy: big cuts in programs for the elderly.

The Peterson Foundation is joined by leading "blue dog" (anti-deficit) Democrats such as House Budget Committee Chairman John Spratt of South Carolina and his counterpart in the Senate, Kent Conrad of North Dakota. The deficit hawks are promoting a "grand bargain" in which a bipartisan commission enacts spending caps on social insurance as the offset for current deficits.

President Obama's economic advisers devised today's White House fiscal responsibility summit to signal that the president takes the deficit seriously and to lay the groundwork for such a bipartisan deal. Originally, Peterson was slated to be a featured speaker.

But Capitol Hill sources say that Democratic congressional leaders were skeptical of the strategy. The summit has been reduced to a lower-profile, half-day event; Peterson will attend but no longer has top billing, and Obama reportedly is lukewarm about the idea of a commission.

Obama should indeed be wary of such a plan, and official briefings on his first budget suggest that he will drastically reduce the deficit by 2013, but without going after social insurance.

What's wrong with the story of entitlements wrecking the economy? Plenty.

For starters, the $56 trillion "unfunded liability" figure relies on creative accounting. Only about $6.36 trillion is the actual public debt, according to the U.S. Treasury. Most of the number Peterson cites is a combination of the 75-year worst-case projections for Social Security, Medicare and Medicaid.

These three programs face very different challenges and remedies. Social Security's accounts are actually near long-term balance. The Congressional Budget Office puts the 75-year shortfall at only about one-third of 1 percent of projected gross domestic product.

Social Security is financed by taxes on wages -- and since the mid-1970s, wage growth has stagnated. If median wages rose with productivity growth, as they did during the first three decades after World War II, Social Security would enjoy a big surplus. Even without a raise for working America, Social Security needs only minor adjustments.

Medicare really does face big deficits. But that's because Medicare is part of a hugely inefficient, fragmented health insurance system. It makes no sense to "reform" Medicare in isolation.

If we just cap Medicare, needy seniors would get bare-bones care while more affluent people could supplement their insurance out of pocket. The decent cure for Medicare's cost inflation lies in comprehensive universal health insurance so that the entire system is more efficient and less prone to inflation. You don't hear many budget hawks supporting that brand of reform.

The deficit hawks' story also contends that we are sacrificing our children's future by too much (deficit) spending on the elderly. In fact, today's young adults are already falling out of the middle class because of the high costs of the investments we don't adequately finance socially -- child care, college tuition and health insurance. But fiscal conservatives seldom call for increased investment in the young. Today's young, of course, will be tomorrow's retirees, and they will need social insurance, too.