Business, Congress, Content, Domestic, Issue — October 31, 2010 at 8:58 pm

The Debt Offensive: Focusing on Entitlements

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In the first half of 2010, investor confidence in several European nations plummeted. For years these nations had experienced debt accumulation and increasing budget deficits. Understanding the urgency of the crisis, virtually all Western European countries—even financially secure ones—implemented austerity programs and made efforts to decrease structural deficits. Despite the transnational support for austerity, the policy has been met with strong public disapproval: Government approval ratings have fallen while Europeans have staged massive protests, many of which have turned violent. Many Europeans have chosen to blame ineffective government policy, corrupt politicians, and greedy bankers for their current predicament rather than the obvious culprit—acclimation to and reliance on budget-busting entitlement programs and government services. Even at the brink of economic disaster, entitlement programs across Europe, which provide education, health care, pensions, and other services, are sacrosanct. The slightest reform efforts, such as France’s recent proposal to increase the retirement age by two years, are met with outrage and disdain. These negative responses to austerity demonstrate the key danger of entitlement programs in democratic societies: Once they are instated or augmented, they are extremely difficult to diminish or abolish.

While the European quandary merits serious investigation and analysis in and of itself, many of the lessons that have been learned thus far could prove useful to the United States. Numerous reports have found that the U.S. could face serious budget trouble in the coming years. The United States Government Accountability Office (GAO) said in January 2010 that “no one can say with certainty what the next 75-years will bring, but simulations by GAO, the Office of Management and Budget, Congressional Budget Office and others, all show an unsustainable long-term fiscal path.” Projections from the GAO report show that the net interest on debt is likely to reach 5 to 12 percent of U.S. GDP by 2040. This research also affirms that although stimulus spending in response to the current recession has influenced this potentially disastrous trajectory, the main determinants of the unsustainable path are entitlement programs such as Social Security, Medicare, and Medicaid. The GAO states that “absent changes to federal entitlement programs, spending on Social Security, Medicare, and Medicaid, and interest on the federal debt will account for an ever-growing share of the economy.” To quantify, one of the simulations from the GAO’s January 2010 report estimates that “ninety-three cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020.”

The dangers posed by lost investor confidence due to high debt and wide deficits are both serious and tangible. The situation in Greece has allowed other European nations to witness the adverse effects of a credit crisis firsthand. In late April, following the downgrade of Greece’s credit rating to junk status, the cost of borrowing skyrocketed with yields on Greek government two-year bonds rising to 15.3 percent. Had the European Union not enacted a rescue package, it is quite possible that Greece would have been forced to either unilaterally restructure its debt or default on existing bonds. Either of these actions could have hurt Greece’s ability to borrow at affordable interest rates for an extended length of time, effectively crippling the economy. Additional economic consequences of overwhelming debt include the “crowding out” of private investment, the need for higher tax rates, and the limitation of government action in response to an economic crisis. The importance of sustainable debt levels became unequivocally clear and this nearly averted disaster served as the tipping point for countries to take austerity seriously.

Critics of European austerity measures warn that cutting government programs can be a dangerous policy course during a recession. There is arguable merit to this claim. One critic of austerity, economist Paul Krugman, has gone so far as to assert that those who take seriously the dangers of a credit crisis “are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.” This claim disregards the grave economic danger that Greece faced just months ago and that other countries may likely face in the coming years. Furthermore, it is essential not to conflate the stimulus programs enacted in response to the current recession with entitlement programs; this article is only concerned with the latter.

The budget problems the United States may face in the future as a result of entitlement programs are evident. Unfortunately, it is difficult for elected officials to address these issues since large parts of the population have become accustomed to them and there are few reforms which a significant majority of the country will support. Thus, reforms of entitlement programs have become “third-rail” political issues because of the devastating electoral consequences politicians may face if they dare to broach the subject. These programs, then, seem to present a conundrum to modern, industrialized, democratic nations; can a democratic system foster reforms of programs that pose significant threats in the future but provide benefits to the citizenry today?

The recent events in Europe provide a model for reform in which in the face of a crisis the government acts swiftly autonomous of public opinion. Legislation that government officials deemed necessary was instituted within days and weeks, even as public support for the reforms and the government leaders who imposed them fell. The empirical evidence strongly suggests that the United States is headed down a path that is fiscally unsustainable and, should this course not change, will surely lead to adverse economic consequences. Such a crisis would undoubtedly prompt legislators to act, with or without the consent of the people. This model of reform is not optimal, since the speed at which action must be taken precludes to sufficient debate on and consideration of various options. Furthermore, if we let the debt problem build to the crisis point, the reforms which must then be implemented are harsher and more painful than changes which could have been made earlier. For these reasons, altering entitlement programs before we reach the brink of economic disaster is advantageous. The question with which we must now concern ourselves with is whether such preemptive reform is possible.

With regard to the three major entitlement programs in the United States, there are a wide variety of technical solutions that have been proposed by scholars, researchers, and politicians. Although these proposals vary widely in their scale, complexity, and goals, virtually all tend to be versions of two possible policies. Robert Clark, an economist at North Carolina State University has stated that the future options for Social Security are clear: “You either raise taxes or cut benefits.” These options are also the foundation for reform proposals of other entitlement programs. Studies have proposed solutions for Social Security that include raising the tax cap to a higher percentage of taxable earnings, increasing the payroll tax rate, raising the retirement age, and investing part of the funds into stock and bond index funds, among a litany of others. The major question with regard to entitlement programs is not whether there are technical solutions to long-term funding problems, but whether the current generation of voters will muster the will to sacrifice short-term advantages for the long-term health of the country, either in the form of higher taxes, fewer benefits, or both, in order to avert problems in the future.

Justin Phillips, an assistant professor of political science at Columbia University, is pessimistic about future reform. He sees the failure of the Tea Party movement—which supports low taxes, small government, and individual liberties—to make entitlement reform a major component of its platform as a signal of just how difficult these programs are to change. Phillips asserts that “although people may support reform in the abstract, once the details of reform become clear, support starts to fall off dramatically.” Therefore, in order to significantly alter Social Security, Medicare, and Medicaid, politicians would need to “pursue reforms in the face of falling support.” While there are political solutions to the collective action problems that arise in the pursuance of a mutually beneficial goal, mutually disadvantageous policies cannot be enacted without legislators jeopardizing their electoral success. This however presents a problem: While politicians are willing to reach across the aisle when there is a mutual benefit, cooperation will never occur in a lose-lose scenario.

Although it is not particularly common for politicians to support legislation that large segments of their constituencies do not support, there are certainly times when dedication to a specific policy or ideology has allowed laws to be passed that may ultimately cost electoral success. One recent example is the Patient Protection and Affordable Care Act (the 2010 healthcare legislation). Public support figures vary, but polling suggests that the reform bill is supported by only about 50 percent or less of the population. Republicans, perceiving the unpopularity of this legislation, have made it a major focus of campaigns and are poised to capitalize on it during this year’s midterm elections. While legislation that is not largely supported by the citizenry can pass Congress, it does not happen very often because of the devastating effects such actions can have on the electoral viability of the supporting party. Despite the recent precedence of Congress passing the unpopular legislation, there is currently no faction in American politics that seems willing to fight the entitlement battle. Indeed, even if there were a willing group, the coalition size and vast amounts of political capital necessary make the prospect of reform even more unlikely. In the foreseeable future, the best outcome that one can reasonably hope for is that legislators begin proposing and passing minor alterations to entitlement programs which, taken in sum, may have a sizeable impact on our current trajectory.

The reform of entitlement programs is one of the defining challenges of modern democratic nations. Recent history has demonstrated that once programs providing citizens with education, health and income, among other services, are put into place, they are nearly impossible to remove. Any expansion of these programs has effectively been permanent as populations have grown accustomed to the state is providing for many of their basic needs. Furthermore, the inherent structure of many entitlement programs, in which recent generations pay for the needs of older generations, make changing the system difficult, for some group is always likely to be marginalized. Thus, problems arise when what is in a nation’s best interest for the future conflicts with what is in a nation’s best interest of generations.

Recent events in Europe have demonstrated that when a crisis strikes, governments are forced to act autonomously, oftentimes in an unpopular fashion. While this outcome is clearly not desirable, it has revealed the consequences of not undertaking pre-crisis reform. In the coming decades the United States will be forced to either make difficult choices or wait until crisis strikes to have legislators and the executive do what is necessary. While trajectory-changing reform may seem like a difficult goal, the damage it inflicts upon the country is far less than that which occurs when the time for deliberation has run out.

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