April 25, 2014

Let's Look at How We Spend, Not Just How Much

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Here is a trivia question: Under which scenario would Social Security, Medicare and Medicaid make up the larger share of non-interest (i.e. “primary”) federal government spending?

A. President Obama’s budget

B. Rep. Paul Ryan’s budget (House Budget Committee)

The answer is B.

Under Ryan’s budget, these programs would grow from 46 percent of primary spending in 2011 to 62 percent in 2021. This compares with an increase to 56 percent under the President’s budget.

The divergence becomes even more pronounced after that. By 2040, Social Security, Medicare and Medicaid account for 74 percent of non-interest spending under Ryan’s budget compared to 62 percent under the President’s budget.

At first, this result may come as a surprise because it is clear that Ryan’s budget would do far more than the President’s budget to curtail the growth of federal health care spending. At this point, neither budget would touch Social Security.

So why would the allocation of federal resources tilt more heavily towards retirement and health care under Ryan’s budget?

The reason is not because Ryan’s budget raises spending more for these programs but because it cuts so much from everything else. And the reason it does this is because the Ryan budget is committed to holding federal taxes to no more than 19 percent of the economy -- slightly above the past 40-year average -- while eventually balancing the budget.

This inevitably produces a squeeze. Without higher revenues than we have typically collected, the growth of programs driven by an aging population and health care costs will consume more of the budget even with the magnitude of the cuts proposed by Ryan.

Arithmetic may compel this result, but it leaves an important question about budgetary priorities: How much are we willing to sacrifice all other priorities in order to accommodate growing programs for an aging population while keeping taxes at the historic level of the economy?

In the case of Ryan’s budget, the answer is: Quite a bit.

Ryan’s claim to producing a balanced budget by 2040 and a debt-reducing surplus by 2050 depends upon shrinking the size of all government programs other than Social Security, Medicare and Medicaid from 12 percent of the economy in 2010 to 4.3 percent in 2040 and 3.5 percent in 2050. This includes not just domestic programs such as education, transportation and scientific research, which can help economic growth if done well, but defense, international assistance, family assistance, and all other entitlement programs.

Clearly, there is waste in these other programs and no serious deficit reduction plan can exempt them from scrutiny. But can we really expect to maintain ourselves as the dominant world power while investing in our domestic economy if retirement income and health care programs take up two-thirds to three-quarters of all federal dollars?

It’s hard to see how. Defense alone now equals nearly 5 percent of the Gross Domestic Product and its post-World War II low was 3 percent. It would be hard to tuck this into Ryan’s assumed level for all other spending.

Generational equity requires that we bring the debt under control. Ryan’s budget would do that. Perhaps President Obama will present a plan for doing so this week. But with either proposal, it is important to recognize that generational equity requires looking at how we spend, not just what we spend. A budget can be balanced in the fiscal sense but still leave an imbalance in the allocation of resources.