A Fiscally Realistic Conservative

As if on cue, today Bruce Bartlett (from behind the NYTimes pay-only fence) offers a thorough explanation for why he – unlike almost all other conservatives in the US – understands the US’s fiscal predicament:

The Real Budget Crunchers

Recently, there has been some discussion on the blogs about growth of the federal budget deficit under President Bush and what measures would be necessary to balance the budget without raising taxes. When I thought this matter through a few years ago, I concluded that it was impossible to cut spending enough to avoid a major tax increase. Moreover, I concluded that the magnitude of the tax increase was so great that it could only be achieved by adding a significant new revenue source — a value-added tax, or V.A.T. — to the federal tax system on top of all the other taxes. Today, I would like to walk people through the data sources so that they can draw their own conclusions about what needs to be done and what might be possible.

…The budget office data show that between 2000 and 2005, the federal budget went from a surplus of 2.4 percent of gross domestic product to a deficit of 2.6 percent. This has resulted from a fall in federal revenues of 3.4 percent of G.D.P. and a rise in spending of 1.7 percent. The fall in revenue resulted almost entirely from a decline in personal income taxes, which have dropped from 10.3 percent of G.D.P. in 2000 to 7.5 percent in 2005. Contrary to popular belief, corporate taxes have actually risen a bit while all other revenues are about the same as a share of G.D.P.

On the spending side, most of the increase — 1.6 percent of gross domestic product — has been for so-called discretionary programs, those requiring annual appropriations… [and] within the discretionary accounts, most of the increase has been for defense, which has risen by 1 percent of G.D.P. Domestic discretionary programs have risen by 0.4 percent.

Some people will look at these numbers and say that the Bush tax cuts are the principal cause of the rise in the deficit. If we simply repeal the tax cuts, much of the deficit will disappear… Others will look at the data and say that almost all the increase in spending is due to the “war on terror” and should be excused. But whether justified or not, the Iraq War is still going to cost a great deal for many years to come.

…Where I really fault President Bush on the budget is with the Medicare drug benefit, which he rammed through Congress in 2003 and which will raise spending far into the future. According to the 2005 Medicare trustees report, the future unfunded liability for Medicare Part A is 2.5 percent of G.D.P. in perpetuity (page 64). The unfunded liability of Medicare Part B is 2.7 percent of G.D.P. (page 101). And the unfunded liability of Medicare Part D, the drug benefit, is 1.9 percent of G.D.P. (page 112). In other words, we would need to increase taxes by 7.1 percent of G.D.P. immediately and forever just to pay for all the Medicare benefits that have been promised — an amount close to what is now raised by the individual income tax.

By the way, the 2005 Social Security trustees report says that the unfunded liability of that program, which Mr. Bush told us over and over again was in dire need of a fix last year, has an unfunded liability of just 1.2 percent of G.D.P. (page 60) — virtually nothing compared to Medicare’s problems. This is especially so when one considers that pension obligations can be estimated very accurately, while those for health care spending are very difficult to predict because of changes in technology and other factors.

In short, President Bush got everything backwards. He made the Medicare problem far worse when he should have been making every possible effort to improve its finances. Then he wasted an enormous amount of energy on Social Security reform when that program’s financial problems are a fraction of Medicare’s. And by failing to fix Social Security, he has still left this as a problem for a future president to deal with.

…What all these studies show is the same order of magnitude. Federal spending as a share of gross domestic product is going to rise by about 10 percentage points of G.D.P. over the next generation — the equivalent of $1.2 trillion per year in today’s economy — simply because of the aging of society, even if no new government programs are enacted. To prevent [this] just through cutting spending would require the abolition of every single thing the government does other than Social Security, Medicare and Medicaid — including the entire Department of Defense.

Obviously, this is not going to happen. And given the political clout of the elderly — who vote in the highest percentages of any age group in society — it seems unrealistic to me that significant savings can be achieved by cutting programs that benefit them. Although some relatively modest program changes, like raising the retirement age, could save large sums over time, such changes require long phase-in periods to allow people to adjust. Thus we are still left with a huge increase in spending as a share of the economy for the foreseeable future. In a future post, I will explain why I think a value added tax is the best way to deal with this reality.

I can’t really find anything in Bruce’s post to argue with…

Kash