A Definition of Unsustainable: The Long-Term Budget Outlook

The Congressional Budget Office has released its latest edition of the Long-Term Budget Outlook, and it makes for grim reading. Federal debt is currently at its highest level since just after World War II, but unlike in those dark days there is no let-up 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:

Therefore, given the aging of the population and the rising cost of health care, the United States cannot achieve all of the following objectives in the future:

• Keep federal revenues at their average share of GDP during the past 40 years.
• Provide the same sorts of benefits for older Americans that we have provided in the past 40 years.
• Operate the rest of the federal government in line with its role in our economy and society during the past 40 years.

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 is the very definition of unsustainable. The CBO has essentially echoed the warning of Standard and Poor’s from a few weeks back, warning that things cannot go on this way.

So what are policy-makers to do? The current 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, with industrious states like Texas (Germany) continually bailing out welfare states like California (Greece). Massive tax increases to preserve government spending will Californicate the rest of America. 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. They are a necessary but not sufficient condition of recovery. That is because, as CEI demonstrates every year, the growing burden of regulation – government without large spending — 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, policy makers 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 entitlement/outlay programs — Medicare, Medicaid, Social Security, and Obamacare (not forgetting that there is also a significant local outlay problem in the shape of public sector pensions)
• Solve the problems of the present by enacting significant deregulation along these lines, thereby stimulating business activity, reducing unemployment and increasing government revenues without increasing taxes.
• 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 microfinance, to name just two.

Only by tackling all three aspects of the problem can we shunt America off the track it is hurtling down at the moment — which is straight over a fiscal cliff.