Heading Off the Budgepocalypse


Neither the Democratic proposal put forth by Senate Majority Leader Harry Reid nor the GOP proposal offered by House Speaker John Boehner offer the sort of reform needed to put America's budget on a sustainable long-term path. What sort of fiscal diet would it take to get the federal books into shape? Via the Center for a Responsible Federal Budget, Congressional Budget Office director Douglas Elmendorf recently laid out the broad options:

  • Raise federal revenues significantly above their average share of GDP;
  • Make major changes to the sorts of benefits we provide for older Americans;
  • Substantially reduce the role of the rest of the federal government—that is, defense (the largest single piece), Food Stamps, unemployment compensation, other income-security programs, veterans' benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—in our economy and society.

So the choices are to either raise taxes dramatically in order to pay for the growth of entitlement spending; overhaul entitlements, especially Medicare; or bulldoze the foundations of the non-entitlement aspects of the budget—not just defense spending, but a host of other federal programs too. There's no ideology at play here, unless you count a bias toward fiscal reality; this is just the minimum required to make the basic budget math work. 

Defense spending can and should be reduced dramatically, but even the sort of wholesale cutbacks in troop deployment that get tagged as radical and impossible wouldn't be enough. Which means that even though some libertarians might find the third idea appealing (if only as a starting point), it would be hard to make it work.

Liberals might look at the first option and argue that the problem can be fixed by raising taxes. But the sort of tax hikes that would be required aren't merely unpopular, they're historically unprecedented—and they would require far more than closing a few loopholes and raising taxes on higher earners. 

In the next ten years, the federal government is projected, under the rosiest scenario, to run a budget deficit of about $7 trillion. But according to former Congressional Budget Office director Douglas Holtz-Eakin, allowing the tax cuts first passed during the Bush presidency to expire, thereby increasing the top two tax rates and the rate at which capital gains are taxed, would net only about $1 trillion in deficit savings over the same time frame.

That means middle class tax hikes would be required—big ones, too. Paying for entitlements to grow apace would require the government to consume a dramatically larger percentage of America's economic pie. Historically, as Nick Gillespie and Veronique de Rugy have often noted, the federal government has run on an average of about 18-19 percent of GDP. The all-time annual high is 20.9 percent, during the peak of World War II. Allowing entitlements to grow as planned would require raising taxes so much that they eat up more than 30 percent of GDP.

Think passing entitlement reform is hard? Try working up to a (more than) 50 percent across the board tax hike, or something roughly like it. 

Even President Obama knows that in the long term, Medicare can't be fixed simply by raising taxes. The program "will run out of money, and we will not be able to sustain that program, no matter how much taxes go up," he said last week. Substantial entitlement reform, in other words, is the most likely—and perhaps the only plausible—path forward. The debt limit debate might have made a good platform to start planning out that path. It's too bad that neither party did