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The Congressional Budget Office (CBO) has released its latest edition of the Long-Term Budget Outlook, and it makes for grim reading. The assessment needs to be read and understood by every member of both the administration and the legislature. It tells us quite simply that our fiscal policy is unsustainable. If policymakers fail to act now or act in the wrong way, they will condemn our children to live in an America unrecognizable to the Founding Fathers.
Federal debt is currently at its highest level since just after World War II, but unlike in those dark days, there is no letup in increasing public expenditure in sight. America’s welfare-state chickens are coming home to roost, as the retirement of the baby boomers “portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare and Medicaid.”
Add to this government investment in health care rising sharper than any other per-person expenditure, and we have a situation that the CBO director describes starkly on his blog, where he says, “Putting fiscal policy on a sustainable path will require significant changes relative to our historical experience in popular programs, people’s tax payments, or both.”
America’s current fiscal policy has reached a point of no return. The CBO has essentially echoed the advisory from Standard & Poor’s that I wrote about here in April, warning that things cannot go on this way.
So what are policymakers to do? Unfortunately, the current fiscal debate is between two options, of which one is disastrous and the other doesn’t go far enough. The first option - raise taxes to balance the books - would turn America into a European-style welfare state, sclerotic and indeed a repudiation of America’s founding genius. The trouble is that America already resembles the European Union internally. Industrious states like Texas (which play the role of Germany) continually bailing out welfare states, such as California (which are instantly recognizable as Greece). Massive tax increases to preserve government spending will turn the rest of America into one giant California. There will be no other nation willing to bail us out, unless China suddenly discovers a feeling of international bonhomie that has somewhat been lacking in its foreign-affairs history.
The other alternative - large spending cuts - represents only a partial solution. Cut are a necessary but insufficient condition of recovery. That is because, as the Competitive Enterprise Institute demonstrates every year in its report “Ten Thousand Commandments,” the growing burden of regulation - intrusive government without large direct spending - also represents a serious impediment to wealth creation. Indeed, internal studies suggest that our figure of $1.75 trillion in annual regulatory costs to the economy actually understates the size of the burden.
Therefore, policymakers should pursue a three-part solution to the long-term budget problem:
*Fix the problems of the past by enacting serious reform of the main expenditure programs - Medicare, Medicaid, Social Security and Obamacare (not forgetting that there is also a significant local expenditure problem in the shape of public-sector pensions).
*Solve the problems of the present by enacting significant deregulatory policies, in order to stimulate business activity, reduce unemployment and increase government revenues without increasing taxes. Such policies include the abolition of entire government departments, establishing an independent bipartisan deregulation commission, adopting the “one in, one out” principle of no new regulations without repealing older regulations, and ensuring proper review of agencies’ claims of benefits resulting from regulations.
* Wall off the future by ensuring that Americans yet to be born are not saddled with the same “terms and conditions” of the welfare and regulatory state as their forebears. To this end, the government should withdraw not just from Afghanistan, but from its adventures in regulating new sectors such as technology and domestic microfinance, to name just two.
America needs to recognize that the period of big government begun by Herbert Hoover and Franklin Roosevelt was an aberration that has led to this unsustainable situation. If we are to live up to the founding values of America, we must heed these warnings and act now.