Ride the Death Spiral

Vicious cycles in entitlement spending


The Long-Term Budget Outlook, released last week merely puts the Congressional Budget Office's imprimatur on what taxpayers under the age of 40 have known for years: We're fucked.

The CBO's projections indicate that our current spending policies will become unsustainable over the next half century. We face a choice between unprecedented rates of taxation, steep (and politically unpalatable) cuts in government benefits, or simply racking up debt until we've crippled the economy while nevertheless requiring some combination of tax hikes and benefit cuts. The last, most insane option is also the most politically probable.

The source of the problem has been long familiar to policy wonks. The American population is aging (and longer lived), while technological developments drive up health costs even as they extend our lives. The pending mass retirement of the Baby Boom generation threatens to make entitlement spending explode like Tetsuo turning into the amoeba-monster.

As CBO Director Douglas Holtz-Eakin told the audience at a New America Foundation event [Real], that means that public policy "auto-pilot is not an option". But there are obstacles to grabbing the throttle.

One is that there are plenty of interest groups eager to peddle the comforting message that nothing is wrong to a populace squeamish about tough choices. The AARP's John Gist is representative of attempts to persuade us that there's no need to fear those beloved entitlement programs. Gist soothingly coos: "Entitlements overall have grown at virtually the same rate (2.6% per year) as inflation-adjusted GDP (2.57%) since 1975, and only two-thirds as fast as income tax revenues (3.84%)." Strictly speaking, this is true, but it's nevertheless grossly misleading.

In 1967, the first year for which the CBO lists numbers for each program, Medicare, Medicaid, and Social Security together accounted for just under half of all federal entitlement spending, which stood at 6.3 percent of GDP. In 1975, the baseline year chosen by the Gist, total entitlement spending had jumped to 10.9 percent of GDP, but the proportions were about the same. The three programs accounted for a quarter of federal outlays. The same three programs are now up to 71.5 percent of federal entitlement spending, and about 42 percent of total spending. Gist's claim is true because he lumps in those burgeoning programs with other entitlements, such as farm price supports, whose slice of the total economic pie has shrunk. Even leaving that aside, Gist relies on ham handed extrapolations of the sort that prove if you haven't died over the past 25 years, you're immortal.

A 1997 poll conducted by The Washington Post, Harvard University, and the Kaiser Family Foundation found that, by large margins, citizens oppose cutting entitlements to balance the budget. As the Post put it, "more than three-quarters of Americans believe the federal budget can be balanced without touching Social Security and Medicare benefits—despite claims to the contrary by congressional budget experts." The experts are right in this case, of course, but economists lack both the AARP's lobbying heft and the public's seemingly unshakable popular faith in fiscal miracles.

At a November Democratic primary debate in Iowa, John Kerry, backed by Dick Gephardt, developed a full-sentence stutter, asking rival Howard Dean over and over again whether he would dare to "slow the rate of growth of Medicare." Dean hedged a bit, then replied: "We will not cut Medicare in order to balance the budget." This leaves the governor a bit of fudge space, depending on whether one counts a decrease in a program's growth rate as a "cut" (reform opponents typically do), but the need to leave that fudge space suggests that reports of the death of the "third rail" in American politics have been exaggerated.

A recent ABC News poll showed mixed reactions to the new Medicare prescription drug benefits, with 32 percent supporting the reform and 38 percent opposed. You might think that's because, as Reason's Jacob Sullum has persuasively argued, the new bill is massively, irresponsibly costly.

But that seems unlikely, as indicated by the higher opposition to the reform among seniors who, unless seized by a sudden pang of guilt for the hole into which they're tossing their grandchildren, have the most reason to favor more "generous" benefits. It seems, that is, that people oppose the bill because it's not irresponsible enough. That squares with a Harris Poll conducted before the passage of Medicare reform this summer, in which 21 percent of respondents favored passing "current proposals even if the benefits will still leave many seniors with big out-of-pocket costs," while 52 percent wanted legislators to "oppose this bill and fight for a more generous benefit, even if it is unlikely to pass any time soon"

What about the tax end, then? The CBO's "rosier" scenarios assume that the current Alternative Minimum Tax remains unchanged. The AMT, which now accounts for only 2 percent of individual income tax liability, would acount for 20 percent by 2050. During the same period, because the tax isn't inflation indexed, it would begin creeping down the income brackets: Whereas some 2 percent of U.S. households are currently subject to the AMT, it would affect 70 percent by 2050, yielding a de facto tax hike. Federal tax receipts eventually rise to almost 25 percent of GDP under this scenario.

Economist John Maynard Keynes once quipped, in response to critiques of the long-term effects of his policies, that "in the long run we are all dead." In the context of entitlement programs for the elderly, that puts a particularly sinister spin on the phenomenon Milton Friedman called " the tyranny of the status quo." New benefits may be debated when first introduced, but for both psychological and political reasons, become near impossible to eliminate once in place. But the same is true, to a lesser extent, when taxes are at issue. The prospect of a 9 percentage point rise in federal tax reciepts is also unlikely to be popular. But thanks to the corporate fictions we call "countries," politicians can dodge the bullet—for a while—via rising debt. Of course, this only makes matters worse. As the CBO report observed, "The longer that lawmakers delay acting to counter an unsustainable budgetary situation, the larger the spending cuts or tax increases will eventually have to be."

And there's the rub. The more dire the long term problem grows, the greater the cost, and the political resistance, of doing something to fix it now. So, for instance, debate over private account reforms for Social Security stalls on the size of "transition costs," which are much less than the cost of not reforming, but must be borne in the present. The question now is whether we've passed the point of no return: Whether the near-term pain required to fix things will continue to multiply with the long-term cost of inaction at a rate that keeps us locked on course. Perhaps, sometime soon, citizens will be struck with the spirit of civic and intergenerational responsibility, bite the bullet and clean up the mess their predecessors made. Or perhaps, if we're lucky, the scam will last long enough for us to pass the bill on to our kids.