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A Simple Guide: Budget Responsibility And Big 3 Entitlements

Herein, is the Ornstein handy guide to Washington’s budget dilemma. The good news? It’s simple. We don’t need complex macroeconomic models or breaking news about revenue projections or economic developments to shape our thinking about taxes and budgets. The bad news? It’s simple. [IMGCAP(1)]

The key is a small set of numbers: government spending on the Big Three entitlement programs of Social Security, Medicare and Medicaid. Here they are, as told by the Congressional Budget Office:

In fiscal 1964, before the Great Society began in earnest, Social Security comprised 13.8 percent of federal budget outlays. Medicaid was a miniscule 0.16 percent. Medicare wasn’t even miniscule, since it had not yet been created.

Ten years later, fiscal 1974, as the Vietnam War wound down, Social Security was up to 20.4 percent, the relatively new Medicare program was 3.9 percent, and Medicaid was 2.1 percent. Make that 26.4 percent for the Big Three entitlement programs, compared to 14 percent a decade earlier.

Cut to 1984, midway into the Reagan era. Medicare nearly doubled to 7.1 percent, putting the Big Three entitlements at 30 percent of federal spending. 1994? Just before the Gingrich revolution, Medicare shot up again, to 10.9 percent, and Medicaid had more than doubled to 5.6 percent, leaving the Big Three at 38.1 percent of the budget.

We are now grappling with the fiscal 2004 budget, a year that begins this coming Oct. 1. The CBO projections — under current law, without any of the changes or new policies (like a prescription drug benefit for seniors) proposed by the president or Congress — show Social Security up to 22.1 percent and Medicare and Medicaid up sharply again (12.7 percent and 7.5 percent, respectively), leaving the Big Three at a whopping 42.3 percent of outlays. And here are CBO projections for 2012: Social Security at 24.6 percent, Medicare at 15.6 percent, Medicaid at 10.6 percent — the Big Three, in other words, at 50.8 percent of outlays!

So let’s review the numbers. The Big Three entitlements have gone like this, decade by decade, as a share of budget outlays since 1964: 14 percent, 26.4 percent, 30 percent, 38.1 percent, 42.3 percent, heading in eight years to 50.8 percent. Now, as a percentage of gross domestic product: 2.55 percent, 4.9 percent, 6.7 percent, 8.1 percent, 8.3 percent, heading in eight years to 9.2 percent.

So do these Big Three numbers finally stabilize and stick around the 50 percent mark of the budget or the 9 percent range of GDP? Of course not. 2012 is just a couple of years after the first wave of baby boomers retires. So under current policies, CBO estimates that the Big Three continue to mushroom, hitting a staggering 77 percent of the federal budget by 2040, or nearly 17 percent of the country’s GDP! [IMGCAP(2)]

Now add in another 3 percent to 4 percent of GDP for defense, and we have a simple but chilling set of facts:

1.) The modern (i.e., post-Great Society) average size of the federal government share of the American economy has been around 19 percent of GDP — including all programs, from education, the environment, the FBI and CIA, drug enforcement and health, to foreign aid, nation-building and diplomacy, air traffic control, homeland security and highways, not to mention interest on the national debt.

2.) By 2040, defense, Social Security, Medicare and Medicaid will together make up more than 20 percent of GDP, about a percent or so more than the modern average for all federal outlays. That leaves no room for anything else (including those pesky interest payments).

These are projections under current policies. The main proposal for change on the table is a prescription drug benefit for seniors under Medicare — a big-time plan to increase the costs of the program and the share of outlays going to the Big Three, or the opposite of restraint. To paraphrase House Majority Leader Tom DeLay (R-Texas), the $400 billion over 10 years for prescription drugs in the president’s budget is a floor, not a ceiling. If Congress and the White House do what they will probably do, the cost of the prescription drug benefit will exceed $500 billion and will probably grow from there.

There is no serious dispute about these numbers. And they should lead to probing questions and then sobering lessons for Members of both parties.

For Democrats, it should be clear by now that their reflexive support for the Big Three — in which they miss no opportunity to demagogue the entitlements to death and encourage bidding wars to expand the size of the programs — is feeding a giant tapeworm that is squeezing everything else they hold near and dear in the federal role. We are very close to a zero-sum game, in which more money for these entitlements means less money for Head Start, Women, Infants and Children, education and the environment. The common Democratic solution to the long-term fiscal problems in Medicare and Social Security is to add to their revenues; if it does not include some plan to reduce their spending paths, there will simply be no room left over for spending on other things. The alternative — to let the federal budget grow to 25 percent or 30 percent of GDP — is neither good nor feasible. Will anybody besides Sen. John Breaux (D-La.) have the insight and guts to say so?

For Republicans pushing for more and bigger tax cuts to go along with the $1.5 trillion implemented in 2001 — tax cuts that start with the president’s proposed $674 billion over 10 years, add in another $200 billion in investment and retirement plan incentives floated by the Treasury Department, have a wish list of corporate tax breaks and additional goodies that total another few hundred billion, and will ultimately have to include fixing the alternative minimum tax problem (another $500 billion to $700 billion) — let’s begin with one simple question: What are you smoking?

A short-term tax cut for stimulus purposes is one thing. These tax cuts are long term and mean permanent erosion of the federal tax base. Instead of hovering at the level near 20 percent of GDP, revenues could decline to 15 percent or less — leaving gaping holes in the budget and huge and growing structural deficits in the decades ahead. Once the revenue base is decimated, it will be extraordinarily difficult to replenish it if and when it is necessary.

I could feel better if I thought there was a real plan to restrain the growth of the entitlements. There isn’t. Give kudos to House Budget Chairman Jim Nussle (R-Iowa) for recognizing that the tax cuts cannot be achieved without entitlement restraint. But his gutsy budget plan, which calls for reducing a Medicare prescription drug benefit below the $400 billion level, doesn’t get specific about what could actually change the growth path of Social Security and Medicare, and thus doesn’t pass the realism test.

As a practical matter, no serious change in these entitlements can take place without broad bipartisan support (just ask former Democratic New York Sen. Daniel Patrick Moynihan or Federal Reserve Chairman Alan Greenspan, or look at the history of the 1983 Social Security reforms). I haven’t seen a less hospitable environment for bipartisan goodwill. Besides, neither the president’s proposed Medicare reform nor private accounts in Social Security do much at all to restrain the growth of the programs. Private accounts in Social Security, unless accompanied by reduced benefits for the part of the payroll tax left in the existing program, weaken the program’s balance sheet instead of reducing its outlays. Not to mention the $1 trillion transition costs. Unless and until we are willing to means test benefit levels or extend retirement ages, we will have little practical impact on the growth paths of these programs.

Here is the bottom line: Anyone who looks at these CBO numbers and still throws roadblocks in the way of serious Social Security, Medicare and Medicaid reform or who continues to support bigger and bigger long-term tax cuts has abandoned his or her fiduciary responsibility to future generations of Americans.