I somehow doubt they realize this.

In the real world -- the world of the globalized dollar economy that we've all lived in for decades -- it's still the case, for now, that the rest of the world wants to hold US dollars as a reserve asset.  (Thank God for that.)  For that reason, the US economy will normally run a trade deficit.  For that reason, the US government will normally run a budget deficit.  Indeed, after allowing for the financial position of the private sector, that budget deficit will normally about equal the trade deficit, medium-term.

No commission can change this.

Medical costs help determine the scale and composition of total spending.  They do not determine the budget deficit.  Cutting medical costs may cut the deficit on paper.  It will not cut it in real life. 

If Medicare and Medicaid costs soar, from an economic standpoint that's just another public sector stimulus. It will raise private incomes.  It will therefore raise tax revenues -- until the budget deficit again falls, roughly to the value given by the trade deficit at the new income level. 

Conversely if Medicare is cut, private disposable incomes will fall.  And then, so will tax revenues, until once again the budget deficit and the trade deficit are in approximate balance.

Yes, I agree -- as everybody agrees -- that health care costs should be brought under better control.

If the ten Canutes are serious about health care costs, they could start by making sure that universal health insurance is enacted – to begin with, by vigorously backing President Obama's health plan. And then they could take on the problem of health care costs directly - in both the private and the public sectors.

But to focus attention on Medicare and Medicaid alone, is just to say that health care costs should be cut for the elderly and the poor alone. That is to say, the proposal would cut costs and services for people who need medical care the most -- and can afford it least. 

Where on earth is the morality in that?

Speaker Pelosi is right.   The idea of a deficit reduction commission is political posturing,  and it's rooted in a failure to understand the underlying economics. 

Commission No Silver Bullet, Actually Could Set Back Deficit Reduction Effort

No bipartisan commission on deficit reduction can magically eliminate the deep divisions that exist today among lawmakers over budget issues.  And, while creating a commission in the face of such divisions may seem harmless, it could actually set back the cause of deficit reduction.

To be sure, commissions have sometimes proven useful when a bipartisan consensus existed on the need for, and the rough parameters of, legislation to address a serious budget problem.   When, for instance, President Ronald Reagan and Speaker of the House Tip O’Neill agreed in 1983 that a combination of benefit cuts and tax increases were needed to keep Social Security afloat, they found it useful to appoint a commission to help craft the specifics of such a plan and build public and Congressional support for it.  Consequently, Congress enacted legislation that secured Social Security’s solvency for more than five decades.

With regard to the Base Realignment and Closure Commission, there was strong bipartisan consensus in Congress on the need to reduce the number of military bases across the nation.  The commission provided a useful tool to overcome the politically difficult geographical issues involved — namely, which bases to close — in order to implement the agreed-upon reductions in the number of bases.  The BRAC commission’s decisions, however, are far different from those that will prove necessary for deficit reduction  — decisions, for instance, about the appropriate level of federal revenues, the role of social insurance and safety net programs, and the tradeoffs between funding for domestic and defense activities generally.

If and when, at some point down the road, a bipartisan consensus exists on budget issues, it may be more efficient for the President and Congressional leaders from both parties to eschew a commission and move directly to crafting the details of legislation themselves.  That’s what happened in 1990 when top aides to the first President Bush, Democratic congressional leaders, and most of the Republican congressional leadership negotiated a budget deal that included tax increases and spending cuts and reduced cumulative budget deficits by $500 billion over five years.

When no consensus exists, a commission is no more likely to produce the desired results than direct negotiations among lawmakers.  That’s what happened when Congress in 1994 created a deficit reduction commission, headed by Senators Bob Kerrey and John Danforth.  Despite the best intentions of the co-chairmen, the commission reached no conclusion about how to proceed with deficit reduction because the fundamental differences between Democratic leaders (President Clinton and congressional Democrats) and Republican congressional leaders prevented commissioners from reaching agreement (and, even had they reached agreement, would have made it impossible to gather the necessary votes in Congress to enact it).  Given that differences between the two parties today on budget issues are at least as great as in 1994, it’s hard to see how a bipartisan commission could succeed.  If the commission members reflected the views of their party, they would fail to reach agreement.  If they did not represent the views of their party, then any agreement they reached likely would die in Congress.

With no obvious path to progress today on deficit reduction, lawmakers and others may be tempted to create a commission on the grounds it will “do no harm.”  But establishing a commission at this time could do some harm by encouraging the two parties to use their appointments to it to demonstrate their undying commitment to positions that are not sustainable in the long run (e.g., no cuts in major spending programs, no tax increases).  That could delay the day when serious bipartisan discussions about the spending cuts and tax increases that will be needed to put the budget on a sustainable path can begin.

And too bad some other Democrats, such as Pelosi, are also opposed. 

In both cases, they are ducking their responsibilities unless they come up with specific proposals to reduce long-term projected deficits – which is not happening and is not likely to happen any time soon. In the meantime, we are courting all kinds of trouble from slower growth, to an economic crisis, along with reduced flexibility to get the economy moving again or handle a new international threat. But perhaps even more important than the effects on the economy is the effects on confidence in government.  

A group of us has been going around the country talking about these issues as part of the Fiscal Wake Up Tour.  We find that citizens are much more upset about the failure of their elected leaders to act than they are about accepting the specific sacrifices that deficit reduction implies. If the two parties could join hands and take joint responsibility for proposing some tough actions the public would go along. 

It has happened before: in 1983 on Social Security reform, in 1986 on tax reform, in 1990 and again in 1997 on the budget. Presidential leadership is needed as well. Too many people on the left think that we can solve the problem by controlling health care costs but it is now apparent that we’ll be lucky if health care reform doesn’t dig the hole any deeper. The bills currently under consideration contain very little that will “bend the long-term cost curve.”  And too many people on the right believe that higher revenues lead to an intrusive and inefficient public sector despite the fact that we are now spending about $1 trillion a year on tax preferences for all kinds of activities, most of which would be better left to the market.