The Continuing Adventures of an Insurance Company With an Army

Jeffrey Dorfman observes that barring some transcendent conversion experience large federal deficits are here to stay:

Defense spending is up by $232 billion above inflation and population growth, representing about 22 percent of the inflation and population-adjusted spending increase. Obviously, we have the wars in Iraq and Afghanistan to thank for some of this, but those wars are winding down now. Secretary Hagel is proposing spending cuts to stay within the sequester-proposed spending limits. If Republicans are serious about reducing government spending, they probably need to find some defense cuts that they can live with.

Spending on social safety net programs-Medicaid, unemployment benefits, housing subsidies, food assistance, and another seventy-plus programs the federal government runs-has increased a total of $294 billion beyond inflation and population growth, accounting for 28 percent of the extra spending growth. Certainly some of this is related to the 2007-2009 recession and to the increased cost of health care, but the recession ended 56 months ago so it seems somewhat specious to blame these costs on economic conditions five and one-half years ago. Rather, it seems likely that the Obama administrations persistent and extremely active efforts to sign more people up for all these government benefits is a significant contributing factor to the explosion in this spending category.

Finally, we get to the government benefit programs for the elderly. Spending on Social Security and Medicare has risen by $415 billion above and beyond if it had grown at the rate of inflation plus population growth. Partly this is due, to the number of elderly growing at a faster percentage than the overall population and partly it is due to President Bush’s Medicare Part D prescription drug coverage program. Regardless of the causes, spending to benefit the elderly accounts for 39 percent of our above-inflation-and-population-growth spending increase.

There is no ready alternative to any of those programs, there is no will on the part of either major political party to cut any of those programs enough to make a difference, and there’s even less will to raise taxes enough to pay for them. Hence, his conclusion: mammoth federal budget deficits are here for the foreseeable future.

That’s all well and good for the federal government which is a monetary sovereign and can credit itself with the money to finance its deficits with a wave of an electronic wand. The situation is different for state and local governments. Their budgets will be pressed by the poor and elderly as well and they’re already about at their credit limit. Illinois, for example, has raised its taxes substantially, still has a fiscal nightmare on its hands, and has the worst credit rating among the states. Additionally, in the low trust environment we’ve been entering even more law enforcement, something traditionally left to state and local governments, will be required. Their problems are likely to become worse rather than better.

That brings up something I’m surprised isn’t more obvious to people. An aggressive regulatory state inherently produces greater income inequality. The rich will always get preferential treatment and they’ll inevitably use it to become even richer. That’s an alternative not open to the rest of us.

3 comments… add one

  • steve

    “An aggressive regulatory state inherently produces greater income inequality.

    Germany, Scandinavia, Japan, Australia, New Zealand.

    High inequality-Latin America, Africa, etc.

    Rather than correlating with regulatory state, it looks more like a cultural and governance issue to me. When you slip into a full blown kleptocracy, you certainly get inequality, but I dont think that is necessarily done by regulations.

    Steve

  • High conditions of trust among their citizens not to mention the confidence in the government that so frequently accompanies it are typical in the countries you’ve listed that have low income inequality. How aggressive are their regulatory requirements? The only one with which I’m familiar, Germany, is no more so than ours but we have far less trust in our fellow-citizens and even less in our government.

    That was the obvious context of my observation, wasn’t it:

    Additionally, in the low trust environment we’ve been entering even more law enforcement, something traditionally left to state and local governments, will be required. Their problems are likely to become worse rather than better.

    That brings up something I’m surprised isn’t more obvious to people. An aggressive regulatory state inherently produces greater income inequality. The rich will always get preferential treatment and they’ll inevitably use it to become even richer. That’s an alternative not open to the rest of us.

    The question is not what those countries’ conditions are now but what would they be like if low trust were added to the mix. Unless you’re suggesting that heavier regulations produce greater trust. I’d certainly like to see the evidence for that. I think it’s the reverse. Conditions of higher trust make tighter regulations more possible.

  • Red Barchetta

    “Illinois, for example, has raised its taxes substantially, still has a fiscal nightmare on its hands, and has the worst credit rating among the states.”

    Damned Republicans. Oh, wait…….. I’m not worried, though. With those 8% portfolio returns funding the public pensions its all good.

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