Wednesday 01st October 2014,
Penn Political Review

How to Fix a Budget

Nathan E. July 21, 2011 Soapbox Blog Comments Off

All of this can get expensive.

Many families can attest to the fact that balancing the family budget can be a struggle. It requires buying less or earning more, which is hard, but it eventually has to happen. And as muchpeople wouldn’t like to believe, just cutting out trips to the vending machine probably won’t solve the problem.

The same principle is at work in our current debate over America’s budgetary habits. When people in conversation or on air complain about Air Force One, Congressional salaries and offices, and shrimp on treadmills, they are completely missing the only truly salient point in the debate about America’s debt—that the only significant long-term contributors to growing spending (and debt) are entitlements and interest on the debt.

Discretionary spending, which is approved annually, makes up just under 40% of the budget. Of that 40%, over half of the money goes to defense. That means that the whole of discretionary non-defense spending is only a fifth of the overall budget. If we are to balance the $3,500,000,000,000 budget by eliminating science experiments that cost $500,000 each, then we are going to have to cancel more than 2 and a half million science experiments. (All of the budget numbers that I am using come from tables provided by the Office of Management and Budget unless otherwise noted).

So where is the rest of the money going? It pays for a few small mandatory programs, but approximately half of the entire budget (and over 80% of mandatory spending) goes to pay for the Big Three of entitlements (Medicare, Medicaid, and Social Security), as well as interest on the debt. The sums spent are staggering, but they are rarely debated with as much interest because there is no annual reauthorization. Whereas Congress can make a stink every year about defense spending, there isn’t always the opportunity to complain about these mandatory programs. But the amount of money the government spends on these programs continues to increase steadily—spending on Health and Human Services (Medicare and Medicaid) has doubled in the last ten years.

The spending spree looks set to continue. Barring major policy changes, spending on all of the entitlements, but Medicare especially, will consume an ever-greater part of the budget until sometime in the 2030s, when, according to the Congressional Budget Office, every tax dollar is spent on an entitlement or interest payments.

The odds of us reaching that point are pretty low. Presumably the country would face a major debt crisis before reaching that point, or we would have finally realized our economic peril and taken immediate and drastic steps to rein in spending on these important but mind-bogglingly expensive programs.

In his 2012 budget, known as the “Path to Prosperity,” Congressman Paul Ryan (R-WI) wrote that entitlement programs “were created with a 20th century economy in mind. They were not designed for the new demographic and economic challenges of the 21st century.” He describes how demographic (an aging population), economic (fee-for-service payment), and political (short-term electoral gain at the price of long-term sustainability) factors make the current situation untenable. All three of these problems are real, but some of them are harder to deal with than others. It will be hard to prevent the population from aging (besides death panels, of course), and politics will probably not be redefined in the next fifteen years as something other than a biennial competition for committee chairmanships. That means that the heavy lifting will have to be done by economics.

Not all of the entitlements are equally severe problems. Social Security plays a relatively minor role in America’s future solvency; there are many alternatives to fully fund the program going forward. Even Medicaid can be largely addressed by introducing means testing and helping beneficiaries escape poverty (and thus be removed from the program). The future of American solvency, then, rests on Congress’s ability to get Medicare spending under control. To maintain the current benefit scheme with an aging population and rising medical costs, we either need to drastically raise taxes and continue to raise them indefinitely, shift costs away from the government, dramatically lower the costs, or employ some combination of those options.

While there are some who argue that the government should not increase its revenue at all, most economists and most Americans agree that a deficit reduction package ought to include revenue increases. While most would like to see it only affect the rich, it debunks the claim that the majority of Americans oppose any tax increases. But even if we can increase a tax here or there by a few percent, there is no way that it could bring in the hundreds of billions of dollars needed to balance the budget. To raise enough money, taxes would have to be raised so high that the effects on the economy would be to profoundly discourage growth, so the tax still wouldn’t raise enough money. Taxes alone cannot be the whole answer.

Another option is to shift costs away from the government. That option is one that has been pursued by the current House majority. The Ryan budget would change Medicare from a fee-for-service program into essentially a voucher program. The government would give each Medicare beneficiary a subsidy to buy their own private healthcare, but the value of the subsidy would decrease relative to the cost of insurance, so the government would indeed reduce its own spending, but it would be simply pushing the spending onto private citizens. It might lower costs, but that would depend on market forces affecting the price of healthcare more than they do.

And that is the problem with the third option (lower costs). Healthcare costs are notoriously hard to control, but if we want to tackle overall Medicare spending, then we have to come up with a method to seriously reduce expenditures—by the government or by patients. If we fail to come up with a way to lower costs, we will have to drastically reduce the program’s benefits. The sooner we start dealing with the issue, the less pain there will be at any one time. There’s no reason to wait before making the necessary changes. This week seems as good a week as any to start.

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About The Author

Nathan, a rising sophomore at Penn, is from Missouri. His favorite book is the Complete Calvin and Hobbes.

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