Former Treasury Secretary Larry Summers claimed at a Wednesday lunch that the “Republican vow to significantly reduce the size of government is a foolish pipe dream” due to “structural economic realities.”
What are these realities, according to Summers?
- An aging population will mean upward pressure on entitlement spending on unchanged policy.
- The rise in inequality requires government spending to “ameliorate” the consequences.
- Prices tend to rise relatively quickly in service sectors such as education and healthcare, necessitating more government spending.
- Rising national security threats and increased military spending by geopolitical foes will necessitate more U.S. military spending too.
Where to start?
Summers is right that, on unchanged policies, government spending would balloon due to aging.
The Congressional Budget Office projects spending on Social Security would rise from 4.9 to 6.3 percent over the next 30 years, whilst Medicare spending would nearly double from 3.1 percent of GDP to 6.1 percent. The impact of all that extra spending, even as non-Social Security and healthcare spending is projected to fall from 8.9 percent of GDP to 7.6 percent, is a growing budget deficit and accumulated debt. This would raise net debt interest payments further, such that by 2047 the U.S. budget deficit stood at (a completely unsustainable) 9.8 percent of GDP.
These long-term projections come with all the usual caveats. They use assumptions about the likely path of productivity growth in the economy, population growth, and the extent of labor force participation. Nevertheless, this analysis does highlight the scale of the contingent liabilities embedded in current policy.
The Harris Poll finds that most Americans favor cuts in foreign economic aid, foreign military aid, spending by the regulatory agencies generally, space programs, subsidies to business, and federal welfare spending. All good stuff.
On the other hand, a significant plurality opposes cuts in defense spending. Fewer than one in four favor cuts in federal education spending or health care. 11 percent favor cutting Social Security payments. Over one-third favor spending more on education, health care, and Social Security.
How seriously should we take these results?
Simple observation of Congress suggests that most Americans are not willing to pay more taxes. The Obama administration found that in focus groups Democrats were not willing to raise taxes on anyone except individuals making more the $200,000 annually or families above $250,000 each year (now you know why the Obamacare taxes are the way they are). Taxpayers evidently are not willing to pay for current spending since the annual public deficit runs into the trillions.
I conclude that survey respondents want to sustain or increase public spending at a cost to someone else, perhaps "the rich" or future citizens who will repay public debt. These survey respondents, in other words, want a free ride. A more charitable interpretation would be that respondents have not thought much about the cause and effect relationship between spending and taxes, at least with regard to the abstractions posed in a survey. Neither interpretation flatters the respondents.
I recall James Madison's remark in Federalist no. 10 that majorities tend toward policies antagonistic to "the rights of other citizens, or to the permanent and aggregate interests of the community." Policymakers have little reason to take seriously these fantasies. Whether they will have the courage to ignore them is another question.
A lot has happened since President Obama introduced his last budget in February 2010. His party took an historic "shellacking" at the polls for its big government policies, his Fiscal Commission recommended serious spending cuts, and European governments have illustrated the severe problems of deficit spending.
Given all this, did the president adopt a more frugal and prudent approach in his new budget yesterday? Not at all--the spending levels in his new budget are virtually the same as the unsustainably high spending levels in his February 2010 budget.
The chart shows Obama's proposed spending for FY2012 from last year's budget, and his proposed spending for the same year from his new budget. His new budget proposes slightly more discretionary and entitlement spending for next year than did his last budget!
- Last year, Obama planned to spend $1.301 trillion on discretionary programs in FY2012, but now he plans to spend $1.340 trillion.
- Last year, Obama planned to spend $2,107 on entitlement programs in FY2012, but now he plans to spend $2,140.
So take that Tea Party!
Obama claimed in his "Budget Message" yesterday that "taking further steps toward reducing our long-term deficit has to be a priority," but looking at his actual budget numbers shows that isn't true.
For more budget numbers, see my NRO summary.
A top agenda item for the incoming House Republicans is to immediately start cutting spending. The GOP promised to reduce “nondefense” (or alternatively “nonsecurity”) spending for 2011 to the 2008 level, representing a $100 billion cut. GOP leaders are now being accused of backsliding on that promise, so let’s take a look at the numbers.
The idea is to reduce fiscal 2011 “budget authority” to the level it was in fiscal 2008. The chart shows the growth in nondefense budget authority since 2000. The spike in 2009 is from $265 billion in discretionary spending authorized in the “stimulus” bill.
Congress currently has a “continuing resolution” in place that keeps 2011 spending at about the same level as 2010, as shown in the chart. Thus, the House GOP will need to cut spending for the remainder of this fiscal year by about $55 billion to hit the 2008 level. That is less than $100 billion, but the higher cut number was based on proposed spending by Obama for 2011 that wasn’t enacted.
The important thing is that Congress needs to start cutting all types of spending right away. We face a fiscal emergency as debt is exploding, and there are many federal spending activities that are damaging to society and the economy. The GOP should cut defense and entitlement spending as well, but nondefense discretionary cuts are a good place to start.
In considering cuts, note that about $136 billion in nondefense discretionary “stimulus” bill money is still sloshing through the government in 2011 and beyond, so spending cuts (unfortunately) won’t starve the bureaucracies as much as liberals might fear.
The chart puts proposed spending cuts in context. House GOP leaders now admit that they spent too much during the past decade, and indeed the chart shows that nondefense discretionary spending jumped $264 billion over the last decade. Much of the increase came when the GOP controlled the House, Senate, and White House, so now is the GOP’s chance to start reversing out those Bush-era increases.
Data note: current stimulus and nondefense discretionary budget authority data are available on pages 13 and 21 of CBO’s August outlook.
From my oped in today's Investors Business Daily:
Rep. Paul Ryan's (R-Wis.) "Roadmap for America's Future" proposes even tighter limits on Medicare's growth, leading columnist Bruce Bartlett to opine, "the Medicare actuaries have shown the absurdity of the Ryan plan by denying that Medicare cuts already enacted into law are even worthy of projecting into the future."
On the contrary, experience and public choice theory suggest that the Ryan plan has a better shot at reducing future Medicare outlays than past efforts, because the Roadmap would change the lobbying game that fuels Medicare's growth.
Congress uses price controls to pay Medicare-participating providers. Those providers invariably complain that Congress sets prices too low, but many are no doubt too high.
Congress chose to pay for ObamaCare's new entitlement spending in part by ratcheting down many of those prices. That suggests supporters either believe that Medicare's controlled prices generally exceed the marginal value of the relevant services, or that those prices will begin to exceed marginal value as providers become more productive (i.e., as they learn to provide those services at a lower cost).
Neither assumption is necessarily wrong. Producers operating under price controls nevertheless have an incentive to improve productivity. When costs fall relative to prices, producers get to keep the difference. Ambulatory surgical centers saw a windfall because Medicare took two decades to update those price controls for productivity gains.
Medicare's chief actuary and many others doubt that providers will realize the productivity gains assumed by Congress. If the assumed productivity gains do not occur, those price reductions would reduce Medicare enrollees' access to care. Medicare providers and enrollees would likely persuade Congress to block the price reductions. Medicare spending and the federal debt would rise.
Yet even if those productivity gains do occur, ObamaCare's price reductions would still reduce access compared to a world without them, therefore enrollees and providers may still persuade Congress to eliminate them. Regardless of what happens with productivity, as Tom Daschle notes, the patient-provider pincer movement usually carries the day.
This is an inherent defect of Medicare not found in markets. Competitive markets automatically translate productivity gains into lower prices for consumers. Medicare protects providers at the expense of enrollees and taxpayers.
(Cross-posted at National Journal's Health Care Expert Blog.)