Domestic — March 7, 2013 at 12:39 pm

The Hot Potato

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When the dust clears, the recently realized sequestration maneuver will succeed to do at least one thing: to show Americans that our budget crisis cannot be solved without addressing entitlement spending. As of the spending cuts that were officially triggered this past weekend, the United States has at least started the grueling process of balancing its budget after decades of decadence, indulgence, mismanagement, and shortsightedness. Ultimately, this process has been an act of delaying to address the cornerstone of our budget woes—entitlement spending.

There is some good news. Taxes have at least started to go back up—the New Year’s compromise this winter saw payroll tax breaks end and taxes go up for the wealthiest Americans culminating in $600 billion dollars in new projected revenues over the next ten years. As of the sequestration and the failure to reach a budget compromise before March 1, this past Friday, $500 billion dollars of defense spending cuts and $500 of non-defense discretionary spending cuts were enacted to be phased in over the coming decade.

Do not, however, let these large numbers lead you to the belief that our budget problems are anywhere near solved. The Congressional Budget Office projected in 2011 a ten-year budget shortfall of $13 trillion dollars—that is, $13 trillion dollars will be added to the United States’ public debt between 2011 and 2021. In this light, the budget changes so far enacted accomplish merely a fraction of what must be done.

What must ultimately be done to deal with out budget woes? What is the one aspect of our deficit that everyone in Washington knows to be the problem? The one answer to this question is the entitlement programs of Social Security, Medicare, and Medicaid.

Of the roughly $47 trillion dollars that the Congressional Budget Office predicted the United States will spend between 2013 and 2024, approximately $24 trillion dollars, over 50%, of that will be spent on these entitlement programs.

More savings need to be carved out of the bloated Pentagon budget, taxes need to rise dramatically for many Americans, specifically the top earners, and certain discretionary spending programs will need to be curtailed. Efforts to balance the budget through these avenues alone however will ultimately prove illusory if entitlements go untouched. Petty squabbles over Planned Parenthood, foreign aid, and food stamps are so insignificant in terms of actual dollars and cents that it is laughable when they are claimed to be “draining our budget.” Likewise, taxes must go up for the country’s highest income earners but by no means will the budget be balanced through an all-out tax crusade against the wealthiest Americans.

Thus far, the President has been noticeably quiet on the issue of entitlements and understandably so—much of his democratic base in Washington is inextricably tied to preserving these entitlement institutions. However, the President Obama will have to end his silence.

No individual member of Congress, all 535 of them, can ultimately muster the leadership and the political will to address this glaring issue. Can you blame them? Over 435 of those members will be facing an election in less than two years. There is however one elected representative in Washington who is constitutionally barred from running as an incumbent to his or her current office and that person is President Obama. It will ultimately be up to you, Mr. President, to turn your back on the base of your party and to call for entitlement reforms. These reforms will include some combination of raising the Social Security retirement age, the age for Medicare eligibility, the capping of eligibility for entitlement benefits, and the devolution of funding to the states. There is no congressional district in the United States where people will not be affected by cuts to these entitlement programs.

President Obama, you are ultimately the one person in Washington who has the political power to orchestrate entitlement reform. However unpopular these reforms will be for an aging population, a frank assessment of the trajectory of the federal budget shows that entitlement spending is the root cause of our budget woes.

Your legacy may be tainted, your image as a champion of the middle class put under question, but a long-term analysis of the United States’ fiscal situation dictates plain and simply that the there is no solving the budget shortfall without taking an axe to our entitlement spending programs.

Should President Obama resolve nothing, when the next President is inaugurated in 2017 he or she will face the entitlement issue through the lens of his or her potential reelection campaign in 2020.

President Obama, you have a window of opportunity to at least start the process of righting the wrong in our bloated entitlement budget. Argue for more taxes, argue for less defense spending, agree with Republicans to curtail certain domestic discretionary programs, but it will be solely up to you to lead all members of Congress towards a compromise on entitlement spending. President Obama, only you can catch the hot potato.

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  1. Harrison, please read something by any Keynesian economist. Your conservative viewpoint on this issue is half-baked, overly general, and wrong. Nearly all economists agree that during times of recession the government needs to spend more to encourage spending among the public. During times of prosperity, the government should cut back on this spending (I would explain why but just watch a YouTube video on Keynes or something. Joe Hall posted something about Hayek vs. Keynes like a month ago and, more recently, something about how many economists actually agree that we need to take this approach.).

    Your argument relies on three simple facts (The CBO report, tax $, and sequestration $) and a flawed notion that debt is bad. I wish I could take the time to explain this in full detail, but I can’t so go read The General Theory of Employment, Interest, and Money.

  2. I appreciate your comment Sam. Because you raise some interesting points, I will give a longer reply to your letter in a second column that I hope to release in the next few days.

    Let me just address your comment quickly now. First, your comment hinges on the idea that I am discussing growth in my column, which I do not address at all. My column is simply a discussion of balancing the budget. “Debt” in and of itself, as you say, is not a bad thing. Runaway deficits and exponentially growing debt-servicing payments are, however.

    I am all for a government spending heavily on investments during recessionary periods to boost macroeconomic output. However, the trend over the next decade is one of a ballooning deficit due to unfunded liabilities.

    The United States’s economy will recover within the next decade and normal growth will return. What is not going away are the structural deficiencies of the current entitlement system which must be reformed.

    Our entitlement programs are a system that every respected economist, from the most neo-liberal to the most keynesian, agrees must be changed.

  3. You slightly misunderstood my comment (though I blame myself as the comment was rushed). I know/am painfully aware that you did not talk about growth in your column. Our entitlement programs our benefiting us right now, as I type, by creating growth (and some debt). Since you neglected to talk about the growth our entitlement programs are currently creating for us, your “discussion of balancing the budget” seemed to be suggesting that we need to take immediate action.

    I am thoroughly satisfied with the rest of your response, and I hope you will edit this article slightly to note that these entitlement programs do have some value today (They will lose that value tomorrow).

  4. This is the sort of rhetoric that can paralyze American politics.

    I completely agree with you in that entitlement reform will trim economic growth. That is not the point, however.

    I am speaking from a point-of-view that would trade fiscal sustainability, and therefore growth, in the long term for a mild decrease in economic growth over the short-term and the next decade.

    By no means am I implying that all entitlement reforms need be instant; rather, changes such as raising the minimum retirement age etc. must be phased in so that the drop in government spending is gradual.

    Nevertheless, Sam, your comments are a perfect example of the short-term thinking which renders Washington politics so stagnant–it is the type of thinking which enables politicians to favor the next election cycle over the economic health and fiscal soundness of the next 2, 3, or 4 decades.

    I am speaking of, as you are hopefully well aware, the threat of our budget being crowded out by debt-servicing from our unresolved entitlement commitments. An unresolved entitlement system today, as you protect, would threaten to render domestic discretionary programs–infrastructure spending, education, research, and other investments–secondary to paying our entitlement liabilities. I shudder to see a world where the United States is borrowing massively to pay our entitlement liabilities, which are fixed and non-discretionary, at the cost of being able to shift funds towards these other domestic programs which I would argue are far more beneficial to the economic health of the United States.

    You must realize, Sam, that there is no easy way of reforming our entitlement system. There is no silver bullet which will lead to fiscal soundness without a minor drop in economic growth in the near future.

    I would argue, however, that the long-term always trumps the short-term, that today’s petty nearsighted politics are no means on which to craft American policy for the next few decades.

  5. Harrison, we share the belief that entitlements need to be reformed. Where we differ is when they need to be reformed. I believe that we need to grow our economy back to moderate health (we are getting there) and then make some changes. You believe that we should diminish growth now (while the economy is still in a semi-poor condition) by reforming entitlements in order to avoid crippling debt in the long-run.

    Unfortunately for your argument, the short-term matters. As John Maynard Keynes said, “In the long run we are all dead.” You are making this argument too intellectually easy for yourself by saying that we need to fix entitlement reforms to save ourselves from a disaster that will take the form of the U.S. acquiring a lot of debt and then… well… you didn’t say, but I would asume you would say defaulting on our debt or mass inflation to lower the value of our debt (Both of which, as Krugman has pointed out, are extremely unlikely with even the amount of debt the CBO said we would acquire of the next 10 years). Regardless of what you think will happen, you are already worried about the next disaster. There will always be a next disaster. That is the nature of an economy run by imperfect beings (This has been the case since the beginning of free market societies: “Let’s all buy tulip bulbs!” or “Who wants to fund my trip to a place that is so profitable I wont even tell you about it?”). If you insist upon worrying about how to fix our future problems before we solve our current problems, you will stagnate the economy.

    I would love here a detailed argument about how we should reform our entitlements, but I don’t want to act off that argument until we fix our economic woes.

  6. I appreciate the scintillating column, Harrison.

  7. Sam, you again misinterpret not only my column as a whole, but also the relationship between entitlement reforms and the long-term health of our economy. Your argument rests on the assumption that my article is calling for immediate, across-the-board slashes to entitlement spending which would be reckless. As I have repeatedly said these reforms must be phased in over the next decade so as to avoid the calamity that could arise in the long-term.

    It’s about making the long-term changes now that would achieve fiscal sustainability not tomorrow, not next year, nor even in five years, but that would achieve fiscal sustainability within ten or fifteen years–well beyond when the United States’ economy will be suffering from its current drag.

    If I can generalize, ‘aggregate demand’ today will not be affected by changes to entitlements that will phase in over the next decade.

    Furthermore, your economic mindset seems perhaps too linked to the simple dollar-and-cents adjustments of aggregate demand. Certainly, aggregate demand must be boosted during a period of low economic growth, but what of the supply side? You call my argument ‘half-baked’ and ‘conservative.’ Although I declare that my point-of-view is neither, I would like to point out that there are certain aspects of the ‘supply side that ought to be taken into consideration as well.

    What of the instability in capital markets should America’s fiscal situation be unresolved for another decade? America was able to absorb one credit downgrade markedly well, but how will world financial markets respond to further downgrades should our deficits continue to widen?

    What of the crowding out of crucial domestic discretionary programs by entitlement spending? Rather than spending simply on consumption through the entitlement system, I would rather the United States spend considerably more on education, infrastructure, research, and other investments so as to improve American economic competitiveness in an increasingly competitive environment.

    Also, your comment that the United States is in a ‘disaster’ at the moment strikes me as rather hyperbolic. Economic growth is far from where it should be, but we’ve certainly climbed back from the abyss. I would argue that a major factor limiting our current economic growth rather stems from a lack of investment rather than low consumption–the United States needs to retrain its workforce, ‘rebuild our roads and bridges’ as the President says, and invest in 21st century energy technologies. There are millions of available jobs in the United States, but there is a mismatch of worker skills and the requisite job skills. This is the great drag on American economic growth, Sam.

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