Cato Studies: “It’s the Spending, Stupid: A Looming Fiscal Train Wreck”

May/​June 2011 • Policy Report

In “Bankrupt: Entitlements and the Federal Budget” (Policy Analysis no. 673), Cato Institute senior fellow Michael Tanner paints a grim picture of America’s fiscal future, but notes that “no one should be shocked to learn that government spending is out of control.” Under Presidents Bush and Obama, federal spending has nearly doubled over the last decade, with budget deficits at unprecedented levels.

While there has been talk in Congress of cutting discretionary spending, the real problem is entitlement programs — particularly Social Security, Medicare, and Medicaid: “In fact, by 2050, these three programs will alone expand to consume every penny that the federal government raises in taxes.” This “looming fiscal train wreck has been amply abetted by both political parties,” Tanner writes, but adds that “the 2010 midterm elections demonstrated that voters see the debt as a major issue.” Tanner presents the full scope of the deficit and debt and then turns to their common cause: “The reason we have a deficit is pretty simple: government spends too much,” he writes. Tanner closely examines Social Security, Medicare, and Medicaid, mapping their ballooning spending and unfunded liabilities — and shows how the Patient Protection and Affordable Care Act, passed one year ago, will only make the situation more dire. It is not too late to stave off bankruptcy, but it means taking action immediately. “Congress now has an opportunity to change its ways,” Tanner writes. “The coming months will show whether it will.”

Nukes and the Far East
With the New Strategic Arms Reduction Treaty (New START) and the release of the U.S. Nuclear Posture Review (NPR), the Obama administration has elevated nuclear disarmament to the center of its nuclear agenda. But this leaves open the question of “how far should the United States move beyond symbolism in ‘getting to zero’?” writes Lavina Lee, lecturer at Macquarie University in Sydney, Australia, and author of U.S. Hegemony and Legitimacy: Norms, Power and Followership in the Wars on Iraq (Routledge, 2010), in “Beyond Symbolism? The U.S. Nuclear Disarmament Agenda and Its Implications for Chinese and Indian Nuclear Policy” (Foreign Policy Briefing no. 91). Before making this move, Lee argues, the United States should ensure that it “will in fact receive concrete, reciprocal concessions from China and India,” the prospects for which are doubtful. Regarding China, Lee writes, “Given President Obama’s own admission that global zero is unlikely to be achieved in his lifetime, the Chinese have cause to question whether the United States and Russia will voluntarily relinquish their nuclear superiority any time soon.” And with India worried about the threat of its nuclear neighbors, China and Pakistan, “any commitments India is likely to make on nuclear force reductions will be linked to both of these states doing the same.” Before the United States places disarmament at the center of its nuclear diplomacy, it needs to also be aware of the move’s opportunity costs, for there is “the risk that the United States will offer much with respect to nuclear disarmament and get little in return.”

Fannie and Freddie’s Subprime Disaster
“By most accounts, the subprime mortgage market played a key role in the recent financial crisis. Yet there remains considerable debate over what drove that market,” writes Mark Calabria, director of financial regulation studies at the Cato Institute, in “Fannie, Freddie, and the Subprime Mortgage Market” (Briefing Paper no. 120). But after carefully examining and presenting the evidence, he finds a clear culprit: “Fannie Mae and Freddie Mac were not only the largest players in the subprime mortgage market, they were drivers of that market.” Nearly one‐​third of Fannie and Freddie’s direct purchases were subprime, while during the height of the housing bubble, almost 40 percent of newly issued private‐​label subprime securities were purchased by Fannie Mae and Freddie Mac. Calabria argues that the failure of Fannie and Freddie and their precipitation of the housing crisis offer a strong rebuke to government attempts to engineer the housing market. “Ultimately taxpayers and the broader economy will only be protected from future bailouts by a full withdrawal of the federal government from housing policy,” he writes. Calabria concludes, “Our financial system would become considerably more stable were Washington to abandon its attempts to direct capital to politically favored segments of the economy.”