THCB

From Gray to Red

With their vote this week to impose strict limits on future federal spending, House Republicans continued an argument not so much with Democrats as with demography. The real current they are seeking to reverse is not some ideological drive from President Obama to convert America into Sweden; it’s the inexorably rising cost of providing retirement security, especially health care, to an aging society.

The cut, cap, and balance bill that Republicans muscled through the House would authorize an increase in the federal debt ceiling only after Congress approved a constitutional amendment to balance the federal budget. The bill doesn’t specify the spending level at which Washington must balance the budget, but each of the major balanced-budget proposals that House Republicans have already introduced would eventually limit federal spending to an amount equal to 18 percent of the nation’s total economic output.

Federal spending hasn’t represented that small a share of the economy since 1966, when it stood at 17.8 percent. That’s an especially revealing comparison because 1966 was the year when Medicare went into effect—the first guarantee of health coverage for the nation’s seniors. The program didn’t even begin until July 1; Washington spent only about $100 million on it that first fiscal year. Medicaid, which provides care for both the poor and the elderly, was also just getting started; it cost the federal government only about $800 million in fiscal 1966.

Since then, those two programs, along with Social Security, have provided much of the upward pressure on spending. From 1948 through 1966, federal spending averaged just over 17 percent of the economy—about the level that House Republicans are hoping to restore. Since 1967, federal spending on average has grown to just below 21 percent of the economy.

The difference between the two eras is entirely explained by the growth in federal payments to individuals—preponderantly, entitlements for the elderly. In the first period, essentially before Medicare and Medicaid, Washington spent on average an amount equal to 4.2 percent of the economy each year on payments to individuals. Since 1967, the average annual cost of payments to individuals has more than doubled, to 10.5 percent of the economy. If you do the math, that means that as a share of the economy, Washington actually has spent slightly less on everything else—defense, national parks, education, environmental protection—over the past 40 years than it did in the previous 20.

Within the overall explosion in federal payments to individuals, the key driver has been health care—again, predominantly for the elderly. In 1965, federal health care spending equaled less than 1 percent of the economy. Today, the figure stands at 6.3 percent. That’s not because of Obama’s health care legislation, which doesn’t generate significant spending until 2014 and is projected to largely pay for itself by restraining Medicare’s growth; it’s because Medicare and Medicaid now cost nearly $800 billion annually.

Two factors above all are swelling those programs. One is the unbroken rise in per capita health care spending as medical technology advances. The other is the growing elderly population. When Medicare began in 1966, it served about 19 million seniors. Today, the program serves nearly 48 million. Its trustees project that by 2035 that number will approach 86 million.

Against that overwhelming demographic pressure, mandating that federal spending return to its 1966 level is like ordering the tide to reverse its course. Although many Republicans want to cap federal spending at 18 percent of the economy, the nonpartisan Congressional Budget Office projects that Social Security, Medicare, and Medicaid alone will consume about 15 percent of the nation’s total economic output by 2035. And under other scenarios that CBO has explored, even that figure might be optimistic.

That prospect points toward two large conclusions. One is that it’s unrealistic to limit federal spending to levels last seen when the elderly represented only about half as large a share of the population as they will in the decades ahead. Given the demographic demands, future federal spending will almost certainly require more than 21 percent of the economy—although likely less than the swollen 25 percent level reached after 2009’s stimulus program. A corollary is that sooner or later, the demands of providing for an aging society without gutting everything else that government does will require Washington to raise more revenue.

The second large conclusion bookends the first: It would be irresponsible to surrender to demography as fiscal destiny. Unless Washington controls entitlement spending, especially by slowing the overall rise in health care costs, these programs will bury all other public needs and impose unacceptable tax burdens on a working population shrinking in relative size; by 2035 there will be only half as many working-age Americans per senior as there were in 1966.

Too many Democrats resist the need to restrain entitlements, and even more Republicans refuse to admit the need for more revenue. Yet only by moving on both fronts—beginning in the debt-ceiling standoff still convulsing the capital—can the nation go gray without falling dangerously into the red.

This article first appeared at National Journal.

Ronald Brownstein, a two-time finalist for the Pulitzer Prize for his coverage of presidential campaigns, is National Journal Group’s Editorial Director, in charge of long-term editorial strategy. Prior to joining Atlantic Media, Brownstein was the National Affairs Columnist for the Los Angeles Times. He appears regularly on national television, including NBC, ABC, CBS, and MSNBC, and served as a political analyst for CNN from 1998 through 2004.

Livongo’s Post Ad Banner 728*90

Categories: THCB

Tagged as: , , ,

75
Leave a Reply

35 Comment threads
40 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
13 Comment authors
strategy video gamese-liquidTracy McManamonPaoloBarry Carol Recent comment authors
newest oldest most voted
strategy video games
Guest

Hi, I think your website might be having browser compatibility issues.
When I look at your blog site in Opera, it looks fine but when opening in Intsrnet Explorer, it has some overlapping.
I just wanted to give you a quick heads up!
Other then that, great blog!

e-liquid
Guest

Fantastic site. Lots of helpful information here. I’m sending it to some friends ans also sharing in delicious. And naturally, thank you to your effort!

Tracy McManamon
Guest

I just wonder how much Obamacare really will impact our National Debt. We must do something about the Washington politicians in 2012. We so sorely lack real true leadership.

Put the golf clubs down Mr. President and get to work on reversing this train wreck you had the country on right now.

Barry Carol
Guest
Barry Carol

Paolo – I hear what you’re saying and it’s a reasonable argument. While it’s hard to trust politicians to do anything in an honest and straightforward manner, my personal preference would be to divide federal spending into an operating and a capital budget. Just as very few prospective homeowners could buy a home for cash, taxpayers should not be expected to pay cash for assets from office buildings to fighter planes that are expected to last for 30 years or more. Taxes should fund the operating budget, including depreciation on capital assets and “normal” defense spending over an economic cycle.… Read more »

Paolo
Guest
Paolo

Barry, I agree with most of what you say and share the belief that investments should only be done on worthwhile projects. I am not in favor of not-worthwhile spending just to increase the availability of treasuries. What I’m in favor of is setting the level of taxation slightly below the amount of money required for worthwhile projects so that as the economy grows there are enough treasuries to satisfy the need for them. Obviously, this is not a concern these days, but it was a concern as recently as 2000 when Greenspan, fearing that we would run out of… Read more »

Barry Carol
Guest
Barry Carol

Paolo – I don’t have any problem with federal debt for worthwhile capital projects as I said previously. I also don’t have a problem with borrowing, at least to some extent, to finance wars because protecting freedom and our legitimate national security interest benefits future generations as well as our own. Running deficits during recessions is also fine by me though I would like to see the operating budget balanced over an economic cycle. I’m not in favor of non-worthwhile current spending just to run up debt so the Federal Reserve has enough debt securities outstanding to manipulate the money… Read more »

Peter
Guest
Peter

“This is a subjective statement unless your a communist. What is an equitable distribution, give me a number Peter, what percent of income should the bottom 10% make?’

I won’t fall into your false trap of a specific “number”, it’s arrived at from policy. But for some research and insight you can read this:

http://www.economics.neu.edu/papers/documents/03-006.pdf

As well, what do you think was the proper income distribution in Communism where party leaders and cronies were at the top and everyone else was at the bottom? Extremes from any system are not a solution.

Peter
Guest
Peter

Well Nate I tried to post a reply but it disappeared into the abyss of THCB cyber black hole. An attempt to re-post said I’d already said that. Now THCB is not accepting anything.

Nate Ogden
Guest
Nate Ogden

the kaptcha is a cruel mistress

Peter
Guest
Peter

“Which of these is not better off today?” Better off from what Nate, total collapse? Maybe you should ask American voters if they would think the results of default (real or imagined) would be worth it. As for Argentina, maybe a little research on the whole situation might put the “default doesn’t matter” view in perspective. http://en.wikipedia.org/wiki/Argentine_economic_crisis_%281999%E2%80%932002%29#Recovery “While unemployment has been considerably reduced (it has been hovering around 8.5% since 2006), Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population receives 31 times more income than the poorest 10%). This disparity,… Read more »

Nate Ogden
Guest
Nate Ogden

“Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population receives 31 times more income than the poorest 10%).”

This is a subjective statement unless your a communist. What is an equitable distribution, give me a number Peter, what percent of income should the bottom 10% make?

“Maybe you could give us a list of who you would pay and who you wouldn’t. ”

Sure Ptert send me a list of the 80 million checks they cut and I’ll tell you which ones would be released and which won’t.

Barry Carol
Guest
Barry Carol

Paolo – I, for one, would love to have the chance to find out how debt markets and the economy more generally would function if government debt were rarely more than, say 10% of GDP. For example, instead of the $3.6 trillion of U.S. debt now held by federal trust funds including Social Security and Medicare, which will eventually have to be converted to debt held by public investors to meet their obligations, I think it would be better if the money were invested in real assets. Other countries including Norway, Singapore and China have sovereign wealth funds. We would… Read more »

Paolo
Guest
Paolo

Barry – Open market operations by the feds is the primary tool used to regulate the money supply. And even that has proved to be inadequate in the last couple of years as the fed has had to resort to direct asset purchases to increase liquidity beyond what you can do with 0 interest rates. Changing the reserve requirement as you suggest is essentially useless these days since the only assets that are subject to this requirements (bank accounts) comprise only a small part of the liquid assets in circulation (does not include money markets, commercial paper, etc.). I don’t… Read more »

Peter
Guest
Peter

“Personally, I think mortgage loans should require a 20% down payment like they did once upon a time in the 1970’s and before. If it means the home ownership rate is 10-20 points lower that it’s been in recent years, so be it. People can rent instead.” Barry, I’d love that, I’d get a lot more business. I’ve rented and owned and have come to realize that home ownership should be counted on as more lifestyle than investment. If you add maintenance/improvement/mortgage costs the only way you can justify owning is a substantially rising value. If you do it with… Read more »

Paolo
Guest
Paolo

Yes Barry, the nominal amount of outstanding treasuries would remain constant, but the ratio of debt to GDP would continue to decrease until the amount of debt becomes insignificant compared to the size of the economy. For example, our debt during WW2 was in the billions of dollars and that was HUGE compared to the GDP of the time. However, if we would have balanced the budget since then, we would not have enough treasuries today for a functioning debt market. A few billion dollars of debt would not be enough to satisfy the demand for trillions of dollars in… Read more »

Barry Carol
Guest
Barry Carol

Paolo – If we balanced our budget over an economic cycle on a go forward basis, the existing Treasury debt would remain outstanding as new securities are sold to pay off those that mature. Moreover, if our federal government could be trusted to maintain an honest accounting system, which it probably couldn’t be, we could still borrow to finance legitimate long term capital projects like roads, airport expansions, ports, schools, fighter planes and ships, etc. while we balanced our operating budget. For this to work, economically unsound pork barrel projects would have to be avoided or at least minimized. Also,… Read more »

Cory
Guest
Cory

Hey Paolo:
” This will be thanks to the expiration of the Bush tax cuts, increase in tax revenue as we get further away from the recession, and decrease in spending as fewer people will be eligible for government assistance under current law.”

Increase in tax revenue as we get further away from the recession?
I may not understand the math but did you look at today’s growth figures for the economy?
Exactly how quickly are we getting away from the recession?
There i sat least a double digit chance now of a double dip recession. How does that figure into your math?

Paolo
Guest
Paolo

Yes I did. GDP growth has gone up from -5.1 in 2009 ( revised downward today) to +1.3 for Q2 2011. Tax revenues have gone up since then, although it’s been partially offset by temporary tax cuts like the current SS payroll tax holiday. Tax revenue is expected to go up from 15% of GDP today to about 18% in 2014. If you need more details look at the CBO or the Ryan plan projections. If there is a US default and/or a double dip then obviously revenue will dip again and the deficit will grow. Unfortunately a lot of… Read more »

Barry Carol
Guest
Barry Carol

Economic experts, including those at the Federal Reserve, will tell you that the long term potential sustainable real (excluding inflation) growth rate of the U.S. economy is about 3% per year. That’s based on 1% population growth plus 2% productivity growth. While the current and very recent growth rate is lower than that, it’s also been much higher in the past, especially during recoveries from recessions. I think the current recovery is being held back by the extremely depressed construction industry, especially the residential portion of it. The government, I think, has the housing market tied up in knots with… Read more »

Paolo
Guest
Paolo

The numerous economists are probably right. The federal government has never run a surplus over an entire economic cycle and probably never will. If it did, then there would not be a treasuries market since the debt/GDP ratio would eventually shrink to zero. In fact, historically the deficit has averaged 2% over the last hundred years and the economy did quite well when this was the case. The last time we had a surplus (2000), the markets were scared that we were going to run out of treasuries (the CBO projected that by 2006 the debt would be zero). The… Read more »

Nate Ogden
Guest
Nate Ogden

Welcome to TFB, THCB’s younger sister. What would be wrong with no treasuries? Obviosuly the brokers making billions trading them would not be to happy but most of us won’t lose sleep over that. If private money wasn’t tied up in treasuries then maybe we could get the government out of lending. I rather student loans, mortgages, et all be done privately then with the distorting government lending. ” the same party which famously declared last decade that deficits don’t matter is now insisting on a zero deficit balanced budget amendment. From one extreme to the other.” Learning from our… Read more »

Paolo
Guest
Paolo

“What would be wrong with no treasuries? ”

You wouldn’t have a modern monetary system. You’d be going back to the 1890s. Read Milton Friedman to see how central banks should use treasuries to set monetary policy. Conservatives used to like him before the crazies arrived.

Nate Ogden
Guest
Nate Ogden

just becuase central banks did something good in 1913 doesn’t mean they are capable of doing it in 2020. Can’t say I am very impressed with the performance of the central banks and IMF last couple decades, maybe they have passed their usefullness?

Maybe a modern monetary system is one without central banks bungeling from disaster to disaster?

Nate Ogden
Guest
Nate Ogden

This is on RCM discussing this. Sounds pretty familiar, rich bankers using favord laws for the benefit of rich bankers at the cost of the public. Washington bails out the mortgage giants so they can forclose on the homeowners and make a fortune like Soros with OneWest/IndyMac. Americans did not benefit at all with the Soros deal, he makes more money to take people’s houses then if they worked with them. They want us to believe the central bank is in our best interest, I don’t think it is Of course it’s arguable that stability wasn’t the sole reason the… Read more »