OPINION — In budget circles, our federal government is known as an insurance company with an army.
Former Treasury official Peter Fisher explains:
“Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting … is an accident waiting to happen.”
Insurance companies take premiums from policyholders and provide benefits to those who qualify under terms of their policies. They invest the premiums to ensure they can pay future benefits.
The federal government takes taxes from taxpayers and transfers them to individuals who qualify under terms of its entitlement programs. The federal government borrows from China to allow it to pay current benefits.
Regardless of whether you support them or think they should be curtailed, entitlement programs are on autopilot for fiscal disaster.
No, I haven’t exaggerated the role of entitlement programs and downplayed national defense. Nor have I exaggerated China’s role as our country’s largest creditor.
In fiscal year 2016, 73 percent of federal expenditures went to human services such as Social Security, Medicare, Medicaid and other health services, welfare, veterans’ benefits and education. And this doesn’t count about $100 billion annually (yes, billion) in student loans, a disturbing percentage of which will never be repaid.
As for our federal government’s sideline national defense business, 15 percent of the budget went there. Six percent went to interest payments on the national debt and the final six percent to miscellaneous things like infrastructure, the Interior Department and other items that are perennially threatened with cuts to make way for ever-growing entitlements.
Transfer payments from your pocket to entitlement recipients are relatively new. From about 4 percent of gross domestic product in the late 1940s, they’ve grown to over 14 percent. Without benefit changes, they will grow to over 20 percent of GDP in 25 years.
Meanwhile, national security expenses as a percentage of GDP have dropped from about 14 percent during the Korean War to today’s 3 percent or so. Entirely eliminating the Department of Defense wouldn’t cover the growth in entitlement programs.
As a percentage of GDP, all – yes, all – increases in federal government spending since the end of World War II have gone to entitlement program transfer payments.
So has our economy grown fast enough to cover all these transfer payments to individuals?
Since the end of World War II, federal tax revenue has grown 15 percent faster than national income while federal expenditures have grown 50 percent faster. Don’t try this with your personal finances.
Social Security and Medicare benefits will exceed Federal Insurance Contributions Act tax receipts for these programs in fiscal year 2018 by $422 billion, half of this year’s budget deficit. Expressed another way, we’re borrowing money from China to pay benefits today that will have to be repaid by our children and grandchildren.
Until the 1960s Great Society blowout, both parties operated on an informal consensus that regular governmental operations would be borne by those alive at the time. Capital spending that would benefit both present and future generations could be financed through borrowing if necessary.
That mindset was discarded in 1964 when the Great Society declared war on poverty. Through 2014, we’d spent over $22 trillion on anti-poverty programs and yet we have about the same percentage living in poverty now as we did when it started.
The recently-passed Bipartisan Budget Act of 2018 will increase discretionary spending by $174 billion next year. But completely missing from the headlines is the fact that entitlement program spending will increase next year by about the same amount.
Is there a solution to entitlement fiscal madness? Raising FICA taxes by the 35-40 percent needed to cover current outlays would start another Civil War. Yet no politician wants to talk about cutting benefits enough to match current tax revenue.
Expecting today’s politicians to solve tomorrow’s problems is a pipe dream. They have little incentive to jeopardize their prospects in the next election to solve a problem that won’t occur until after they’re dead.
Enacting a constitutional amendment mandating a balanced budget would create its own set of problems and is essentially impossible, Republican posturing notwithstanding.
One thoughtful approach to reining in federal spending has been suggested by Glenn Hubbard, dean of Columbia’s Graduate School of Business, and the Hoover Institution’s Tim Kane. Each year’s total federal spending would be limited to the average annual inflation-adjusted revenue of the previous seven years.
Their approach eliminates the inflation problem and averages over business cycles. They suggest that temporary spending increases could be approved by legislative supermajority votes, with increasingly larger supermajorities required for longer departures from the rule.
Those who reject Hubbard and Kane’s approach offer no alternatives, essentially arguing for the status quo. And the status quo is a recipe for fiscal disaster whether or not you are an ardent supporter of entitlement programs.
My fellow St. George News columnist Ed Kociela ends his columns with the words “No bad days!” Maybe I should end mine with “No new entitlement programs!”
Howard Sierer is an opinion columnist for St. George News. The opinions stated in this article are his own and may not be representative of St. George News.
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