Everything We Want

In his op-ed at the Wall Street Journal Stanford scholar John E. Cogan makes it pretty clear that he doesn’t like deficits or debt:

As the chart makes clear, all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. Surprising as it may seem, the share of GDP that is spent on national defense and nondefense discretionary programs combined is no higher today than it was seven decades ago.

The contrast between the long-term increase in entitlement spending and the long-term decline in defense spending reflects the profound transformation of the federal government’s priorities from providing for the nation’s defense to redistributing income. The Vietnam War, President Reagan’s defense buildup, and the Iraq and Afghanistan wars were costly, but the increase in defense spending in each case pales in comparison with the astonishing growth in entitlement spending.

If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. Show the accompanying chart to your friends or acquaintances who continue to assert that defense spending is causing the budget deficit. Since the early 1970s, entitlements have been the federal budget’s largest spending category, the sole source of the federal budget’s growth relative to GDP, and the primary cause of chronic budget deficits.

Today, entitlement spending accounts for nearly two-thirds of federal spending. Defense spending still only accounts for about a sixth of the federal budget, even with recent increases. Defense spending could be doubled and it would still be only half what the federal government spends on entitlements. Significant reductions in the budget deficit can only be achieved by restraining the growth of entitlement spending.

History shows that such restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up. His budget proposes to shave a mere 1% from entitlement spending that is growing at 6% a year. The president has ruled out any significant reform of Social Security and Medicare, the two largest entitlement programs. His budget shows that this year Social Security and Medicare expenditures will exceed the payroll taxes and premium payments dedicated to supporting them by $420 billion. Social Security and Medicare deficits will account for half this year’s total budget deficit.

The situation is no better at the other end of Pennsylvania Avenue. Democrats are getting domestic spending increases and Republicans are getting increases to the defense budget. Instead of offsetting higher spending with reductions elsewhere, Congress simply increased both defense and domestic spending in the recently enacted continuing resolution to fund the government. At the same time, by eliminating the need to vote on a debt ceiling this year and ruling out the reconciliation process for any budget bill, Congress signaled that it has no stomach for entitlement restraint.

The continuing resolution’s two-year spending binge has been rightly criticized as excessive. But the size of the increase in spending it authorizes should be kept in perspective. The Congressional Budget Office estimates that the resolution will add $174 billion in discretionary spending to the budget in 2019, the year of its maximum impact. At the same time, entitlement expenditures will automatically increase by about the same amount.

What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime.

Financing this spending will require either record levels of taxation or debt [ed.: probably both]. Economics teaches us that high tax rates reduce economic growth and living standards. History teaches us that high public debt aggravates economic volatility and makes a country’s financial system more prone to crisis. Congress can avoid these harmful outcomes only by taking action soon. Its first step should be to send the president’s budget proposal back with a request that he come up with a plan to rein in entitlement spending.

It didn’t have to be this way. Nearly all of the increase is a result of uncontrolled health care spending. Ironically, that’s a consequence of attempting to keep health care within the private sector. If, instead of creating Medicare and Medicaid in the 1960s, the VA had been used as a model and the federal government had opened a series of clinics offering a limited array of services for the poor, the elderly, and, particularly, the elderly poor—the stated intent of the programs—costs might not have risen as they did. That would have needed to have been coupled with a commitment to cost control, the lack of which is the fundamental source of our present problem.

In preemptive response to the inevitable retort that Medicare costs less than private sector health are with lower administrative costs a) because of their structures Medicare and Medicaid administrative costs are largely hidden; b) we’re unlikely to push health care administrative costs below Canada’s which are presently around 15%; and c) they won’t be under a single-payer plan unless you believe that providers will take a pay cut.

As me auld mither used to say we can have anything we want but we can’t have everything we want. Right now most federal government spending is on health care or old age pensions and state and local spending is on health care and public employee pensions and both are increasing in cost faster than economic growth or incomes. Increasing taxation, borrowing more, or simply issuing credit are all likely to create additional problems without addressing the underlying causes of the problems.

I don’t know what the solution is. When you’ve kicked the can down the road long enough, ultimately you run about of road. Whatever the solution is it’s likely to make a lot of people miserable and some people extremely miserable.