In the long run, Congress should put Medicare, Social Security and the rest of the U.S. economy on sounder footing, but, in the short run, subsidizing health insurance for unemployed workers is a good idea, economists told lawmakers today.

The economists testified today at a House Budget Committee hearing on the U.S. economic outlook and budget challenges.

Analysts in the Congressional Budget Office and the Bush administration have warned for years that the Medicare program is already close to insolvency, and that the aging of the baby boomers will pose additional challenges both for Medicare and Social Security.

Vigorous efforts should be made to make Medicare more cost effective, and restraining Medicare cost growth would be a good first step toward comprehensive health care reform, according to Alice Rivlin, an economist who was head of the Office of Management and Budget during the Clinton administration.

“Medicare is the largest payer for health services and should play a leadership role in collecting information on the cost and effectiveness of alternative treatments and ways of delivering services, and designing reimbursement incentives to reward effectiveness and discourage waste,” Rivlin said.

Congress also should take a hard look at Social Security, Rivlin said.

Fixing Social Security is a “relatively easy technical problem,” Rivlin said, adding that the solution could involve a combination of moves such as gradually raising the normal retirement age and indexing it to longevity; raising the cap on the payroll tax; changing the cost of living adjustment mechanism; and having benefits grow more slowly for more affluent people.

The current financial turmoil may have made Social Security less of a political third rail, and fixing Social Security would be a “confidence building achievement for bipartisan cooperation and would enhance our reputation for fiscal prudence,” Rivlin said.

“In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago,” Rivlin argued.

Meanwhile, in the short term, “an important element of the anti-recession package should be substantial transfers to lower and middle income people, because they need the money and will spend it quickly,” Rivlin said. “Helping people who lose their jobs to keep their health insurance and aiding distressed homeowners also belong in this ‘anti-recession’ package.”

Another witness, Mark Zandi, chief economist at Moody’s Economy.com, said that running big deficits is a problem but that Congress has to act to quickly and aggressively to keep panic from making the economy even worse.

Zandi told lawmakers he supports the $100 billion in the stimulus package earmarked for income support for households under significant financial pressure.

“This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance,” he said.

“Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy’s pump,” Zandi said.

Tax cut provisions in the proposed House stimulus package, “do not have the same economic bang for the buck as increased government spending,” as households will save some of the tax cuts or use them to repay debt, and use some of the savings to buy imported goods, Zandi said.

But Zandi noted that tax cuts can get into the economy quickly. He proposed a one-quarter payroll tax holiday for employees and employers. A payroll tax holiday would “provide a large boost to lower- and middle-income households and struggling small businesses,” Zandi said.

Links to the hearing testimony are available here.