A spending goal too small for aging America
The Washington Post, July 28, 2010
I don't want to overreact. I'd hate to prematurely diss President Obama's National Commission on Fiscal Responsibility and Reform, which held its fourth public meeting Wednesday. But the commission's Democratic co-chair, Erskine Bowles, may have already blown it.
In little-noticed remarks a few weeks ago, Bowles suggested that the long-term goal the commission should adopt for federal spending should be 21 percent of gross domestic product. This sounds like a bookkeeping matter. But Bowles' goal would end progressive ambition, ratify America's declining competitiveness and bury the American dream.
Why? For starters, federal spending under Ronald Reagan averaged 22 percent of GDP. Under Bowles's view, therefore, the outer limits of the Democratic Party's 21st-century aspirations would be to run government at a size smaller than did a 20th-century conservative icon.
What's more, Reagan ran government at this size at a time when 76 million baby boomers weren't about to hit their rocking chairs. In 1988, 32 million retirees received Social Security and 33 million were on Medicare, our two biggest domestic programs. By 2020, about 48 million elderly Americans will receive Social Security, and 62 million Americans will be on Medicare (then the numbers really soar).
As a matter of math, if you run the government at a smaller level than did Ronald Reagan while accommodating this massive increase in the number of seniors on our health and pension programs, you have to decimate the rest of the budget.
That's especially the case when you consider that health costs in the Reagan era were around 10 percent of GDP, while they're now 17 percent, headed toward 20. Obviously we need a national crusade to make health-care delivery more efficient. But until there's progress on this front, the 21 percent goal would be tantamount to Democrats agreeing that Uncle Sam should handle health care, pensions, defense and little else.
And that's before factoring in the odds that corporate America will come to its senses in a few years and ask government to relieve it of its crazy health-cost burden, at which point the 4 percent of GDP that big companies now spend on health care might sensibly shift to public ledgers (a shift, by the way, that Kevin Hassett, an economic adviser to John McCain, says would be economically fine). This makes Bowles's 21 percent goal an even more dramatically unrealistic straitjacket.
So what was Bowles thinking?
Perhaps he wasn't. Or perhaps Bowles was thinking of the contours of a bipartisan deal for the commission. Federal spending, thanks to anti-recession measures, is at a high of 24 percent of GDP today. Taxes, meanwhile, have sunk in the sour economy to 15 percent, well below their long-term average of 18 percent.
Split the difference, Bowles could have thought: Bring spending down 3 from 24, taxes up 3 from the average of 18 and call it a day. That can't be too big a lift, he must have reckonedafter all, Bill Clinton left office with surpluses via spending at 18.2 percent and taxes at 20.6.
But here's what Bowles forgot. Clinton didn't have to retire the boomers. And Clinton abandoned the public investments that many advocates in both parties know are overduefrom our massive infrastructure backlog, to our lagging research and development, to remedying the shameful fiscal inequities between rich and poor school districts, to luring a new generation of teaching talent to America's toughest classrooms. And on and on.
Let me be clear: I'm all for ending ineffective programs and reallocating the cash; trimming the bloated Pentagon; and reforming tax subsidies for mortgage interest and charitable contributions, which reserve their greatest benefits for people the wealthier they are. (Obama and departing OMB chief Peter Orszag pushed these last ideas despite intense opposition, for which they deserve credit.) But even the most ambitious such efforts won't change the fatal chains of 21 percent in an aging America.
This fall we'll have a phony debate about extending the Bush tax cuts, when it's inevitable that taxes will rise as the boomers age. It may sound arcane, but the real shape of America's future will be set by the level of GDP at which we aim to finally balance the federal budget againwhether at 21 percent, say, or more like 28 percent. (If we do it right, the economy will thrive with the latter, but that's another column.) If Bowles's Democratic colleagues don't make him walk back his blunder, the great debate this commission should spark about how to marry prudent public finance with America's values and aspirations will be lost before it's even begun.