For all those who think that our deficit is caused by a dearth of revenue, consider this thought experiment. In 2012, the federal government will spend $3.56 trillion. Last week’s Powerball jackpot was a reported $587.5 million, the largest winning Powerball payout ever. In order to finance current spending, the federal government would have to hit that jackpot 6,570 times.
As recently as fiscal year 2001, President Clinton’s last budget, federal spending amounted to just $1.9 trillion. If spending since 2000 had simply increased at the rate of inflation plus population growth, spending this year would have been less than $2.69 trillion. Our budget deficit this year, despite those Bush tax cuts and a recession‐driven decline in revenue, would have been just $241 billion, compared with an actual deficit of more than $1.1 trillion.
To continue this thought experiment, if this inflation‐ and population‐adjusted spending path from 2001 continued to 2022, spending in 2022 would be only $3.61 trillion, compared with the $5.51 trillion the current baseline predicts. This spending path would have seen budget deficits top out at a little less than $400 billion in 2009 and then return to surplus by 2014.
In fact, even starting from today’s spending levels, if future spending grew at inflation plus population, it would be only $4.8 trillion in 2022. The budget deficit in that year would be $199 billion, with deficits decreasing each year.
Compare this to President Obama’s proposed fiscal‐cliff deal, which would increase spending to $5.5 trillion in 2022, the same as the current baseline. That’s right: The president’s proposal does not reduce spending at all. There are no net cuts, not even in the Washington sense of reductions from the baseline. The few programmatic cuts he recommends, most of which lack specifics, are offset by other spending increases. All that spending means that, if the president gets every bit of the $1.6 trillion in new taxes he has asked for, we would still add $6 trillion to the national debt over the next ten years, and run a $661 billion deficit in 2022. Moreover, since there are so few specifics in the president’s proposal, these estimates likely underestimate the amount of spending, debt, and deficits it would incur.
Republicans have countered with an offer that is better — but not by much. Their plan would increase taxes by $800 billion over ten years, half as much as President Obama’s plan but still a major tax hike, regardless of whether they would accomplish this through closing loopholes rather than raising rates. On the spending side, once all the gimmicks are stripped away, Republicans suggest spending $1.4 trillion less than the current baseline over ten years. Federal spending would thus total $5.27 trillion in 2022, about $900 billion more than if it had simply grown at the rate of inflation plus population. This would add an additional $5.14 trillion in debt by 2022, and the deficit in that year would be $540 billion.
It’s hardly worth surrendering on tax revenues for that kind of reduction.
Most significant, neither the president nor Republicans are offering any serious structural reforms to entitlements, especially Social Security, Medicare, and Medicaid. Those three programs alone constitute 44 percent of federal spending this year, and by 2022, they will amount to more than 54 percent of the federal budget. Worse, the real explosion of entitlement costs takes place just outside the ten‐year budget window currently being debated. While entitlement changes will appear to have only a moderate impact on this budget deal, failure to reform these programs will guarantee an unsustainable growth in federal spending over the long term.
Social Security, for example, ran only a $165 billion deficit this year, and in part this is due to the “temporary” payroll‐tax cut that some now want to make permanent. But even beyond the shortfall that cut produces, Social Security was $53 billion in the red this year. By 2022, Social Security deficits (technically, redeeming the bonds in the Social Security Trust Fund) will consume $345 billion in general revenues. But that is just the tip of the iceberg. According to the latest report of the Social Security Trustees (page 15), the present value of the program’s unfunded liabilities is $20.5 trillion.
Medicare’s impact on the budget is even worse, in both the short and the long term. This year alone, Medicare will add some $300 billion to the federal deficit. According to the program’s trustees, its unfunded future liabilities run to more than $42 trillion. But that is actually a best‐case scenario that assumes a significant decline in health‐care costs and the success of several cost‐control measures that are part of Obamacare. If those savings don’t materialize, Medicare’s liabilities could easily run as high as $90 trillion or more. And federal Medicaid spending is expected to rise from $253 billion this year to more than $592 billion by 2022, driven in large part by Obamacare’s expansion of the program. And then after that, Medicare spending really takes off.
In response to this looming entitlement cliff, President Obama has offered an additional $340 billion in Medicare cuts (relative to the rate of growth) over ten years. Some of these proposals are legitimate ideas for cost savings, such as reducing the government’s responsibility for bad debts that hospitals and nursing homes have failed to collect from patients, and charging higher premiums to high‐income Medicare beneficiaries. But cuts of less than $35 billion per year are not going to make a dent in the program’s long‐term liabilities. More important, the president makes no structural changes to the program itself, meaning that the skyrocketing growth will continue virtually unabated. And Social Security and Medicaid? The president’s proposal takes them both completely off the table.
As elsewhere, Republicans do a bit better on entitlements, but only because the president has set the bar so low. The Republican proposal would reduce the rate of growth in federal health programs by $600 billion over the next ten years, with the largest part of that coming from Medicare. Proposals such as raising the eligibility age to 67 reduce spending by less than most people realize in the short term (approximately $150 billion over ten years, in this case), but do lock in substantial savings over the longer term. Still, Republican plans fall far short of the restructuring envisioned under, say, the Ryan budget. That may simply be facing up to political reality, but it won’t come close to making the program solvent.
Republicans have also shown a willingness to take a substantial political risk by calling for Social Security reform. But their proposal for reducing the growth in cost‐of‐living adjustments (COLAs) would save only $200 billion over ten years, not close to what the system owes. Republicans also promise to reduce spending on Medicaid, although details are lacking.
But what both sides seem to concede is that government will in the future be spending a lot more money than it is today. Whether it gets that money through debt or taxes is only one small part of the problem. Both options take resources from the productive sector and transfer them to government, and as a result, we can expect to be far poorer as a nation in the future. That is a much more important issue to debate than tax pledges.