Toward the cliff.

In brief compass, the “supply side” theories of the Reagan administration de-stabilized the traditional budget by cutting taxes without cutting expenditures.[1] Deficits expanded. However, observers were more concerned about the budget deficits that would be driven by the cost of entitlements—Medicare, Medicaid, and Social Security—for Baby Boomers. If one takes as a given that government can only account for some fixed share of GDP, then the growth of entitlements will crowd out spending on other areas: defense and the wide range of government functions labeled as “discretionary spending.”[2] These entitlements are so popular and the mythology surrounding them so powerful that the elected representatives in a democratic polity were unwilling to address them. The problem festered.

Then came the Great Recession. In 2009, the government’s deficit peaked at over 10 percent of Gross Domestic Product (GDP). By 2013 the Congressional Budget Office (CBO) projected that the deficit would fall to 2.1 percent of GDP. Moreover in September 2013 the CBO projected that short-term government deficits would shrink, thanks to the economy’s recovery from the Great Recession and the cuts enforced by “zee zequester.” So, the deficit has been mastered. We’re good, right?

Well, no. The deficit arising from the Great Recession has been mastered. However, that was a matter of course. Counter-cyclical deficit spending has been the normal response to recessions for half a century. Economic activity revises, spending falls, and tax revenues increase, so the deficit goes away.[3]

However, the deficit arising from entitlement programs has not been mastered. Or addressed. Or even acknowledged. Social Security, Medicare, and Medicaid are about to rise sharply in total cost as the fabled Baby Boomers begin to retire in droves. From 1973 to 2013, spending on Medicare, Medicaid, and Social Security averaged 7 percent of GDP per year; the CBO projects that they will rise to 14 percent of GDP by 2038. By 2023, government spending will rise to 3.5 percent of GDP; by 2038 it would reach 6.5 percent. The trouble is that the economy will not grow as much as does government spending. Moreover, federal revenues are projected to rise by only 2 percent of GDP over the same period. Hence, this will drive up the deficit from the 38 percent of Gross Domestic Product (GDP) that formed the average from 1968 to 2008 to 100 percent of GDP in 2038.

Neither Republicans nor Democrats have shown any willingness during the Obama Administration to address this important long-term problem. The administration has concentrated tis efforts on raising taxes on the higher income groups, rather than on trying to contain or reduce costs. The Republicans have concentrated on trying to repeal the Affordable Care Act, rather than on trying to address the ballooning costs of entitlement programs.

Nor is it likely to emerge as a major issue in the 2016 presidential election. Older people vote in larger percentages than do younger people. No one has yet formulated a way to deliver the same quality of medical care or retirement income at a much lower cost. No one yet has formulated a way to raise substantially larger tax revenues from all Americans.

[1] Jackie Calmes, “Budget Office Warns That Deficits Will Rise Again Because Cuts Are Misdirected,” NYT, 18 September 2013.

[2] Obviously, one does not have to agree that some fixed share of the economy should be devoted to government spending. Certainly Senator Sanders does not.

[3] See Paul Krugman’s terse, withering evaluation of President Obama’s performance in this regard in NYT, 8 May 2015.

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