Pragmatic conservative Herbert Stein gave us the Law: “If something cannot go on forever, it will stop”. What that implies is, actions will be taken. It also implies they are unlikely to be immediate.
On Dec. 3, shortly before the “Fiscal Cliff”, the Government Accountability Office (GAO) released new estimates of the federal government’s long-term budget outlook. These numbers will not be changed much by the deal Congress so embarrassingly arrived at just after we went off the cliff. We are still following trends that cannot continue.
Examining them in the order they appear in the table below; first Social Security (S/Sec). Spending will grow by almost a quarter as a % of GDP as baby boomers retire and average life expectancy continues to increase, then stabilize at that level. S/Sec revenue is at this time higher than spending but that will not continue if no action is taken. S/Sec tax used to be levied on 90% of covered earnings. That has fallen to 84% because most wage gains in recent years went to those making more than the maximum taxable income. Raising the maximum so the share of covered earnings goes back to 90% would eliminate almost half of S’Sec’s projected long-term deficit. Other small changes would fix the rest of the potential problem.
“Medicare, Medicaid and other health” spending now totals 4.7% of GDP, almost the same as S/Sec. But at 8.2% it has almost doubled by 2030 then it continues to climb steadily to just under three times today’s level six decades out. That’s the good news. The bad news is our total healthcare spending is 17% of GDP. “Medicare, Medicaid and other health” spending is barely a quarter of the total. Medicare spending will grow as a higher % of our population reaches 65, and Medicaid will grow unless wages increase at the low end and unemployment drops, but those increases are relatively small in the context of our overall healthcare system.
We spend twice as much per capita on healthcare as the next highest nation, 48 million Americans have no health insurance, and other first world nations get better healthcare results. If the 8.2% of GDP we’re projected to spend on “Medicare, Medicaid and other” in 2030 was our total healthcare spend, we’d be in great shape but it’s nowhere close. Although the rate of increase for “Medicare etc” does not need to be cut drastically and it must be done, our healthcare system is far from easy to change.
Bypassing net interest for a moment, we find “All other spending” falls. It will be worthwhile to examine some line items inside this category in another post. Is it, for example, a good plan to keep cutting spending on education? Is it a good plan to continue making war in Afghanistan? Those questions and more are for another day.
By far the greatest problem revealed by the GAO analysis is how our growing annual deficit drives an insane rate of growth in interest costs. The deficit grows because while spending increases steadily at rates that are too high but not alarmingly so, revenue stays at its historical average around 18% of GDP. That drives ever increasing cumulative debt, the interest on which more than doubles from 1.4% of GDP this year to 3% in 2020 and is almost five times as high only a decade later. Even those numbers are only if the federal government continues to be able to borrow at 1.3% through 2017 and 3.7% in the long run, which is not possible.
Stein’s Law tells us that because the deficit cannot continue to grow as it does in the GAO’s projection, it will not. The reason it reaches the impossible height in this projection is because relatively small growth in big spending programs like S/Sec and Medicare compounds into big numbers. In the same way, relatively small changes in the growth rate of those programs would result in big long term changes in the deficit.
And therein lies the problem. The Congress that raises taxes and cuts benefits will suffer politically. Future Congresses will be the ones to get the benefits of lower deficits. If today’s Congress does not take action, future Congresses will be forced to respond to their society’s pain from high inflation and/or high interest rates. But we in today’s society are not feeling those pains, so there’s no motivation to act now. What we are suffering from is low growth but there’s no quick fix for that and many ways we might attack the deficit would likely cut growth more.
Congressional inactivity is something that cannot go on forever but it looks unlikely to stop soon. They blundered over the fiscal cliff. I expect them to blunder through at least the next debt ceiling. Deficit reduction is not likely in the near term.
Note: The GAO document is at http://www.gao.gov/assets/660/650466.pdf