Over at David Stockman's Contra Corner, the former Reagan budget director recalls the time when the national debt was $1 a paltry $1 trillion. The year was 1981.
In the great fiscal scheme of things, October 22, 1981 seems like only yesterday. That's the day the US public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years). What prompts this reflection is that just a few days ago the national debt breached the $18 trillion mark; and the last trillion was added in hardly 365 days….
So in the fall of 1981 it was not merely the symbolic ignominy of crossing the trillion dollar national debt threshold for the first time that weighed on the White House. It was actually driven by fear that acquiescence in giant, permanent deficits would lead to economic ruin.
And by the standards of the past, where even Lyndon Johnson's infamous "guns and butter" deficit of 1968 had only amounted to 2.5% of GDP, the outlook was indeed dire. As I put it at the time, the nation faced 6% of GDP deficits "as far as the eye can see"."
Times have changed. In 2014, the debt reached $17.9 trillion, or over 100 percent of Gross Domestic Product, and will continue to grow. The good news is that we know what to do to shrink the debt to GDP ratio. Economists have shown that the best way to put our fiscal house in order is to adopt fiscal adjustment packages mainly consisting of spending cuts. We also know that the spending cuts that work the best are the ones that target entitlement programs (e.g., Social Security, Medicare, and Medicaid). However, you don't need economists to tell you that. A simple look at federal spending patterns reveals that entitlements are the drivers of the government's current and future debt.
The following chart shows per capita discretionary, mandatory, and net interest spending as a share of total per capita federal spending since 1962 (this is in real 2014 dollars). Rising government spending has largely been fueled by increases in mandatory spending, which includes the major entitlement programs.
As the chart shows, inflation-adjusted mandatory spending per capita skyrocketed from $1,124 in fiscal year 1962 to $6,634 today. Although the initial rise was sparked by the creation of Medicare and Medicaid under the administration of Lyndon Johnson, successive Democratic and Republican administrations pursued policies that fueled the growth in mandatory spending. And while mandatory spending per capita has dropped from its peak of $7,391 in fiscal year 2009 the decrease is only temporary. The aging of the baby boomer generation will worsen the ratio of people collecting benefits to people working to pay for those benefits.
The good news, as I said, is that we know what should be done. The bad news is that neither party has the gumption to do it. Republicans, who have contributed handsomely to the explosion of entitlement spending, have become the party of Medicare. Even reform plans such as the one put forward by Rep. Paul Ryan (R-Wis.) wouldn't go into effect for a decade after passage. And since there is no way to prevent future Congresses from reneging on previously enacted reforms, one should place little faith in a plan that relies on policymakers holding the line in the long run.
But the need to tackle the federal government's unsustainable system of entitlement programs isn't just about dollars and cents. Indeed, the runaway federal entitlement state we have now is the inevitable outcome of the government assuming responsibility for the provision of healthcare and disability and retirement income security. Thus, our goal should be to extricate the federal government from involvement in such concerns rather "reforming" programs that should not exist in the first place. Unfortunately, that's a discussion and debate that nobody on Capitol Hill has the guts to initiate.
The GOP's approach to Obamacare is a perfect example. When pressed on the specifics of abolishing Obamacare, Republicans often proceed to list all of the stuff in the law they are committed to keeping. Democrats are as unreliable when it comes to reforming entitlement spending but at least they are honest about the fact that they're committed to maintaining (or even expanding) the untenable status quo.
Does it matter that neither party is willing to do anything about mandatory spending that will eventually swallow the government and, possibly, the whole economy? Of course it does. But here is where I've got some hope in millennials and younger Americans in general. The generations raised on Amazon Prime, Uber, Reddit, The Hunger Games, and Divergent ultimately won't stand in line for sub-par government healthcare. Will they really accept the massive transfer of wealth from them to relatively well-off seniors? I doubt it. Call me a dreamer but I expect the generations that are the biggest beneficiaries of permissionless innovation to start putting pressure on politicians to come up with ways to get them out of this nightmare fiscal scenario and demand serious reforms of these entitlement programs. We will see.