'It's the Spending Growth That Really Crushes You'

For six years Keith Hennessey worked in the West Wing as a senior economic adviser to President George W. Bush, eventually serving as director of the National Economic Council. Now, as a research fellow at the Hoover Institution, he's brought his briefings to the rest of us, explaining in exquisitely detailed daily memos at KeithHennessey.com just how domestic politics and policy work—and don't work—in Washington. Associate Editor Peter Suderman spoke with Hennessey by phone in March.

Q: How big a problem is the federal deficit right now? What are we in for in the long run?

A: We have a significant medium- and long-term deficit problem. And that problem is driven by spending. Every dollar that's spent by the government has to be financed by either taxing someone today or borrowing that dollar today and taxing them tomorrow. So both the level of taxation and the level of deficits are an outgrowth of how much the government decides to spend.

Q: Do you think the Obama administration has been basically straightforward about its budgeting and the consequences of its budgeting decisions?

A: Our budget challenge gets worse every year that we don't address the growth of entitlement spending. My concerns are that, one, the changes that the Obama administration is proposing are not significant enough and, two, in some ways the administration is proposing changes that make the problem worse. The result is that if the president's policies were all enacted as he's proposed them, we're looking at an ever-increasing level of debt and an ever-increasing level of taxation.

Q: So what should we be doing?

A: We need to address two underlying social factors. One is demographics. People are getting older, and old people are living longer. If we don't adjust the programs that provide benefits to senior citizens—Social Security, Medicare, and Medicaid—then we're going to be paying benefits for more years per person.

Second is growth in per capita health care spending. The president is right on this point to focus on the underlying cost curve.

Past politicians and policy makers have made promises that are unsustainable. And we need to change those promises. Now, you're not going to change them for someone who's on the programs. But you can change the promises you're making now to younger workers, to people in their 20s, 30s, and 40s. And you make bigger changes in those promises for younger workers who have more time to adjust.

Q: Do you think big cuts to entitlement programs are politically viable?

A: It's simple analytically. But it's about as hard as it gets politically because seniors vote and young people don't. There's also a tremendous temptation by both parties to demagogue and to try to scare seniors into voting for their side when the other side tries to make changes.

Ultimately, what's going to happen is that there's going to be pressure to raise taxes. The borrowing costs in the U.S. are going to go up. And the budgetary pressure on other things government does—whether it's defense or education or transportation—will force changes. The problem is that the longer you wait, the harder and more painful it is to make those changes.

Q: It seems like a lot of people these days are starting to define fiscal responsibility as being willing to raise taxes. Is it possible to be fiscally responsible without tax hikes?

A: I certainly think that we should try. Our long-term deficit problems are not driven by taxes being too low. The federal government has collected about 18 cents of every dollar of income produced for the past 50 years or so. And if you assume that that continues, it's the spending growth that really crushes you.