{"id":19859,"date":"2018-03-29T11:00:57","date_gmt":"2018-03-29T15:00:57","guid":{"rendered":"http:\/\/www.megalextoria.com\/wordpress\/?p=19859"},"modified":"2018-03-29T11:03:11","modified_gmt":"2018-03-29T15:03:11","slug":"were-on-the-precipice-of-an-economic-crisis-and-everyone-knows-its-coming","status":"publish","type":"post","link":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/2018\/03\/29\/were-on-the-precipice-of-an-economic-crisis-and-everyone-knows-its-coming\/","title":{"rendered":"We’re on the Precipice of an Economic Crisis\u2013and Everyone Knows It’s Coming"},"content":{"rendered":"

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Writing about federal spending last week, I\u00a0shared five charts<\/a>\u00a0illustrating how the process works and what\u2019s causing America\u2019s fiscal problems.<\/p>\n

Most importantly, I showed that the ever-increasing burden of federal spending is almost entirely the result of domestic spending\u00a0increasing much faster than what would be needed to keep pace with inflation.<\/p>\n

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And when I further sliced and diced the numbers, I showed that outlays for entitlements (programs such as\u00a0Social Security<\/a>,\u00a0Medicare<\/a>,\u00a0Medicaid<\/a>, and\u00a0Obamacare<\/a>) were the real problem.<\/p>\n

Let\u2019s elaborate.<\/p>\n

John Cogan, writing for the\u00a0Wall Street Journal<\/em>,\u00a0summarizes<\/a>\u00a0our current predicament.<\/p>\n

Since the end of World War II, federal tax revenue has grown 15% faster than national income\u2014while federal spending has grown 50% faster. \u2026all\u2014yes, all\u2014of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending.\u00a0Since the late 1940s, entitlement claims on the nation\u2019s output of goods and services have risen from less than 4% to 14%.\u00a0\u2026If you\u2019re seeking the reason for the federal government\u2019s chronic budget deficits and crushing national debt, look no further than entitlement programs. \u2026entitlement spending accounts for nearly two-thirds of federal spending. \u2026What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime. Financing this spending will require either record levels of taxation or debt.<\/p><\/blockquote>\n

Here\u2019s a chart from his column. Only instead of looking at inflation-adjusted growth of past spending, he looks at what will happen to future entitlement spending, measured as a share of economic output.<\/p>\n

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And he concludes with a very dismal point.<\/p>\n

\u2026restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up.<\/p><\/blockquote>\n

I largely\u00a0agree<\/a>. Trump has\u00a0nominally endorsed<\/a>\u00a0some reforms, but the White House\u00a0hasn\u2019t expended the slightest bit of effort<\/a>\u00a0to fix any of the entitlement programs.<\/p>\n

Now let\u2019s see what another expert has to say on the topic. Brian Riedl of the Manhattan Institute paints a rather gloomy picture in\u00a0an article<\/a>\u00a0for\u00a0National Review<\/em>.<\/p>\n

\u2026the $82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades elicits a collective shrug. Future historians\u2014and taxpayers\u2014are unlikely to forgive our casual indifference to what has been called \u201cthe most predictable economic crisis in history.\u201d\u00a0\u2026Between 2008 and 2030, 74 million Americans born between 1946 and 1964\u2014or 10,000 per day\u2014will retire into Social Security and Medicare. And despite trust-fund accounting games, all spending will be financed by current taxpayers. That was all right in 1960, when five workers supported each retiree. The ratio has since fallen below three-to-one today, on its way to two-to-one by the 2030s. \u2026These demographic challenges are worsened by rising health-care costs and repeated benefit expansions from Congress. Today\u2019s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value)\u2026 Most Social Security recipients also come out ahead. In other words, seniors are not merely getting back what they paid in. \u2026the spending avalanche has already begun. Since 2008\u2014when the first Baby Boomers qualified for early retirement\u2014Social Security and Medicare have accounted for 72 percent of all inflation-adjusted federal-spending growth (with other health entitlements responsible for the rest). \u2026<\/p><\/blockquote>\n

Brian speculates on what will happen if politicians kick the can down the road.<\/p>\n

\u2026something has to give. Will it be responsible policy changes now, or a Greek-style crisis of debt and taxes later? \u2026Restructuring cannot wait. Every year of delay sees 4 million more Baby Boomers retire and get locked into benefits that will be difficult to alter\u2026 Unless Washington reins in Social Security and Medicare, no tax cuts can be sustained over the long run. Ultimately, the math always wins. \u2026Fr\u00e9d\u00e9ric Bastiat long ago observed that \u201cgovernment is the great fiction through which everybody endeavors to live at the expense of everybody else.\u201d Reality will soon fall like an anvil on Generation X and Millennials, as they find themselves on the wrong side of the largest intergenerational wealth transfer in world history.<\/p><\/blockquote>\n

Not exactly a cause for optimism!<\/p>\n

Last but not least, Charles Hughes\u00a0writes<\/a>\u00a0on the looming entitlement crisis for\u00a0E21<\/em>.<\/p>\n

Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade.\u00a0\u2026Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. \u2026The unsustainable nature of these programs mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt. \u2026Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations\u2014at which point the country will be farther down this unsustainable path.<\/p><\/blockquote>\n

By the way, it\u2019s not just libertarians and conservatives who recognize there is a problem.<\/p>\n

There have been several proposals from centrists and bipartisan groups to address the problem, such as the\u00a0Simpson-Bowles plan<\/a>, the\u00a0Debt Reduction Task Force<\/a>, and\u00a0Obama\u2019s Fiscal Commission<\/a>.<\/p>\n

For what it\u2019s worth, I\u2019m not a big fan of these initiatives since they include big tax increases. And oftentimes, they even propose the\u00a0wrong kind of entitlement reform<\/a>.<\/p>\n

Heck, even folks on the left recognize there\u2019s a problem. Paul Krugman correctly notes that America is facing a\u00a0massive demographic shift<\/a>\u00a0that will lead to much higher levels of spending. And he admits that entitlement spending is driving the budget further into the red. That\u2019s a welcome acknowledgment of reality.<\/p>\n

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View image on Twitter<\/span><\/a><\/p>\n

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Sadly, he concludes that we should somehow fix this spending problem with tax hikes.<\/p>\n

That\u00a0hasn\u2019t worked for Europe<\/a>, though, so it\u2019s silly to think that same tax-and-spend approach will work for the United States.<\/p>\n

I\u2019ll close by also offering some friendly criticism of conservatives and libertarians. If you read what Cogan, Riedl, and Hughes wrote, they all stated that entitlement programs were a problem in part because they would produce rising levels of red ink.<\/p>\n

It\u2019s certainly true that deficits and debt will increase in the absence of\u00a0genuine entitlement reform<\/a>, but what irks me about this rhetoric is that a focus on red ink might lead some people to conclude that rising levels of entitlements somehow wouldn\u2019t be a problem if matched by big tax hikes.<\/p>\n

Wrong. Tax-financed spending diverts resources from the private economy, just as debt-financed spending diverts resources from the private economy.<\/p>\n

In other words, the\u00a0real problem is spending<\/a>, not how it\u2019s financed.<\/p>\n

I\u2019m almost tempted to give all of them the\u00a0Bob Dole Award<\/a>.<\/p>\n

P.S. For more on America\u2019s built-in entitlement crisis, click\u00a0here<\/a>,\u00a0here<\/a>,\u00a0here<\/a>, and\u00a0here<\/a>.<\/p>\n

Reprinted from International Liberty<\/a>.<\/em><\/p>\n


\nDaniel J. Mitchell
\n<\/a><\/p>\n

Daniel J. Mitchell is a Washington-based economist\u00a0who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.<\/p>\n

This article was originally published on FEE.org. Read the original article<\/a>.<\/p>\n

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