In all the recent reports, speeches, and press conferences concerning the federal budget outlook—including the administration's proposed budget for 2011—hardly anyone has posed these crucial questions: what should the federal government do and why, and who should pay? We ought to go back to first principles of defining a desirable role for government and abandon the expediency of assuming that anyone receiving a federal benefit is morally entitled to it simply because it's been received before.
We have a massive candor gap, led by President Obama but also implicating most leaders of both parties. The annual budget necessarily involves a bewildering blizzard of numbers. But just a few figures capture the essence of our predicament. Here they are:
First, from 2011 to 2020, the administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending. In the last year (2020), the gap is $1 trillion, again approaching a fifth: spending is $5.7 trillion, taxes $4.7 trillion. All amounts assume a full economic recovery. The message: there's a huge mismatch between Americans' desire for high government services and low taxes.
Second, almost $20 trillion of the $45.8 trillion of spending involves three programs—Social Security, Medicare (health insurance for those 65 and over), and Medicaid (health insurance for the poor). The message: the budget is mainly a vehicle for transferring income to retirees from workers, who pay most taxes. As more baby boomers retire in the 2020s, deficits will grow.
Third, there is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases. Suppose we decided to cover all future deficits by raising taxes. Taxes would rise in the 2020s by roughly 50 percent from the average 1970–2009 tax burden.
That's the guts of it. At age 65, average Americans live for about another 18 years. Government now subsidizes each of them by roughly $25,000 a year (almost $14,000 in Social Security, $11,000 in Medicare). We cannot sensibly afford all these subsidies without oppressive tax increases (see above), draconian cuts in other programs, or immense budget deficits that someday might trigger another financial crisis. Bond buyers might balk at swallowing so much debt.
Eligibility for both Social Security and Medicare should be gradually raised to 70, coupled with a requirement for people to buy into Medicare at 65. Wealthier retirees should receive lower Social Security benefits and pay more for Medicare. Programs that have outlived their usefulness need to be abolished: farm subsidies, for instance. Even with these cuts, future taxes would need to rise. Unless you're confronting these issues—and Obama isn't—you're evading the central budget problems.
True, this is a confusing time to engage. Trying to cut the deficit immediately could undermine the recovery; what's needed are credible steps to curb future deficits. It's also true that most Republican congressional leaders (some exceptions: Rep. Paul Ryan and Sen. Judd Gregg) and presidents have ducked the hard questions. Finally, Obama has endorsed a bipartisan commission to propose budget changes. But the commission's powers are unclear, and the administration's goal is modest. It's not to balance the budget; the aim is merely a smaller deficit—one limited to the annual interest payments on the debt. In 2015, that implies a deficit of $571 billion instead of $752 billion. No big deal.
We can no longer just tinker. Delay in acting has already eliminated a long grace period to prepare for reduced retirement benefits or to wind down useless programs. Now we are increasingly condemned to be unfair. If we don't cut spending, the young may complain (correctly) that they've been saddled with immense tax increases; if we do cut spending, beneficiaries may complain (correctly) that they didn't receive ample warning.
The politics of procrastination is bipartisan and rests on shared assumptions: that we don't know that large budget deficits will pro-duce a crisis or when; that, therefore, the easiest political course is to dawdle and blame the other party. But this inattention, coupled with much larger deficits, is tempting fate. If investors lose confidence in Treasury bonds, the ensuing crisis might compel abrupt spending cuts and tax increases that make today's choices look gentle.