An entitlement-driven debt tsunami is about to hit the U.S. The numbers are clear. So why are so many otherwise respectable economists in denial over this fact?
The debt tsunami that is projected to slam the United States is overwhelmingly driven by escalating Social Security and health care entitlement costs. That is the conclusion of a bipartisan consensus of economists and policy experts including staff from the Congressional Budget Office (CBO), Government Accountability Office (GAO), and Office of Management and Budget (OMB), top think tank economists on the left and right, and even politicians ranging from House Speaker Paul Ryan to President Barack Obama. The only real disagreement has been on the preferred mixture of tax and spending solutions.
This is why many were stunned when five elite liberal economists recently published a Washington Post op-ed titled “A Debt Crisis Is Coming. But Don’t Blame Entitlements.”
The authors were five former Democratic chairs of the White House Council of Economic Advisers — Martin Neil Baily, Jason Furman, Alan Krueger, Laura D’Andrea Tyson, and Janet Yellen, who was also Chair of the Federal Reserve. These highly-respected economists asserted that the consensus that entitlements are primarily driving the future debt is incomplete, and that the 2017 tax cuts are as much to blame as entitlement spending.
This conclusion — and the unconventional arguments employed to support it — baffled many economists and columnists, earning responses from John Cochrane, Ramesh Ponnuru, Justin Fox, and Veronique de Rugy. I added my own quick dissent on this page last week.
Because the coming debt tsunami is perhaps the most important economic issue America faces, it is vital to understand its causes. Thus, I have ten questions for Mr. Baily, Mr. Furman, Mr. Krueger, Ms. Tyson, and Ms. Yellen.
Group A: Overall trends:
1) You focus on the 2017 tax cuts as one of the primary causes of long-term debt. Yet last summer — before the tax cuts — CBO had already forecast the budget deficit rising from 3% to 10% of GDP by 2047. How can a subsequent 1 percent of GDP tax cut be a major cause of a budget deficit that was already rising by 7% of GDP due to other policies?
2) You recommend that readers “don’t blame entitlements” for the coming long-term debt explosion — and instead elevate the tax cuts as an equal cause. However, over the 2017 to 2047 period, CBO estimates that total entitlement spending will rise by 4.8% of GDP, and the resulting interest costs on the Social Security and Medicare program shortfalls will add another 4% of GDP. Last year’s tax cuts – if extended – will cost roughly one percent of GDP. Does this not conclusively show that escalating entitlement costs are driving the overwhelming majority of the coming debt?
Group B: Your central data point is that “the tax cuts passed last year actually added an amount to America’s long-run fiscal challenge that is roughly the same size as the preexisting shortfalls in Social Security and Medicare.” On Twitter, one of you clarified this point as “The CBO fiscal gap is ~2% of GDP. The tax cuts if made permanent are ~1% of GDP.” The 2% figure seems to consist of the Social Security and Medicare Part A trust funds. This brings up several questions:
3) Even your own (incomplete) figures show a Social Security and Medicare shortfall twice as large as the 2017 tax cuts. How is that “roughly the same size as the preexisting shortfalls in Social Security and Medicare?” The one percent differential is not some pedantic margin of error, it is equal to the total size of the tax cuts. And if tax cuts totaling one percent of GDP are a fiscal catastrophe, then how does your own 2% of GDP Social Security and Medicare shortfall lead to the conclusion of “don’t blame entitlements?”
4) More importantly, since when do entitlement costs include only the Social Security and Medicare Part A trust funds? Over the next few decades, subsidies to Medicare B and D are projected to grow rapidly and (if combined) become the largest federal expenditure from general revenues. How do you justify not even acknowledging these surging entitlement costs? And how do you justify excluding Medicaid, which is projected by CBO to expand by 0.8% of GDP over the next 30 years, from your entitlement cost figures?
5) Essentially, your entire argument rests on a rhetorical bait-and-switch. The article repeatedly asserts that “entitlements” — which you broadly and accurately define as mainly “Social Security, Medicare, veterans benefits and Medicaid” — are not contributing as much to future deficits as others claim. Yet for evidence, you suddenly shift to measuring only the trust fund deficits of Social Security and Medicare Part A. So virtually all entitlement programs that are primarily funded through general revenues — such as Medicare Part B, Medicare Part D, and Medicaid — are simply not counted, as if they do not exist or have any fiscal effect. How can any credible measurement of long-term entitlement costs not include Medicaid and all of Medicare? They are large and growing entitlements.
6) Perhaps you would answer the previous question by asserting that segregated trust fund programs such as Social Security and Medicare Part A should not be compared to the general fund, which mixes countless tax and spending policies and do not so cleanly represent future federal obligations. If that is the case, your use of trust fund deficits to measure the total budgetary effect of entitlements is still incorrect.
More importantly, that would present another obvious inconsistency. If general fund programs like Medicaid and Medicare Part B/D should not count as contributing to the long-term debt, then why do you harshly criticize the 2017 tax cuts, which are part of the same general fund? Under what possible basis could — within the general fund — tax cuts count as adding long-term debt, but soaring Medicaid costs not count?
7) You compare an annual cost — 1% of GDP in tax cuts — to the 75-year net present value shortfall for Social Security and Medicare Part A. But net present values are not the same as annual average costs or program deficits. Is it not true that a more accurate comparison would match up the one percent annual tax cost with the annual average shortfall of those programs?
Group C: Past and short-term deficits:
8) Assessing the past, you write that: “The federal budget was in surplus from 1998 through 2001, but large tax cuts and unfunded wars have been huge contributors to our current deficit problem.” Well, compared to that 2001 surplus, CBO reports that entitlement spending is 3.4% of GDP higher, defense and war spending is up 0.2% of GDP, and revenues are down 2.2% of GDP. This means that — compared to the 2001 surplus you reference — the current deficit is driven mostly by entitlements. So why did you completely exclude them from your diagnosis?
9) Projecting the future, you write that: “The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending.” But over the next decade, CBO estimates that entitlements will rise by 2.5% of GDP, while the tax cuts will cost 1% of GDP. That tax cuts are making the deficit “higher than had been expected” merely means that we already knew entitlement costs were soaring before the tax cuts were enacted. Is not the relative cost of the policies more important than which one happened to be more recent and perhaps unexpected?
10) Defending the op-ed on Twitter, one of you wrote that “Deficit is T(axes) – G(overnment spending). Don’t know how you can say (the deficit) is caused by T or G.” This seems to assert that the budget deficit is simply the failure to match spending and revenues, so we cannot single out any individual cause like growing entitlement costs. However, your own op-ed singles out that “large tax cuts and unfunded wars have been huge contributors to our current deficit problem,” and that recent tax cuts will widen future deficits. So are you asserting that tax cuts and defense spending can be isolated for their deficit effect, yet entitlement costs cannot?
I look forward to your response to these questions as we work to ensure long-term fiscal solvency.
This piece originally appeared in Investor’s Business Daily
Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here.
This article is republished with permission from our friends at the Competitive Enterprise Institute.
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