Cause for Alarm

The Keynesian Kool-Aid drinkers keep insisting that big deficits and rapidly growing piles of public debt don’t really matter as long as there is „slack” in the economy.

But they live in a fantasy world where ill-conceived policies are not subject to vetting by market and other forces. As the Greeks (among others) are now discovering (to their chagrin), spendthrift nations eventually pay a price for their fiscal irresponsibility. That is also the point being made in the following Reuters report, „US Needs Plan to Tame Debt Soon, Experts Say„:

The U.S. government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday

Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.

Without action, investors could lose confidence in the United States, driving down the dollar and forcing up interest rates, said the former lawmakers and budget officials who crafted the report. That could cause a sharp decrease in the country’s standard of living.

„We will be less free if we don’t tackle this,” said Jim Nussle, a Republican member of the commission who earlier served as a White House budget director and chairman of the budget committee in the U.S. House of Representatives.

The 34-member commission published its report as Congress was poised to raise the debt limit from its current $12.1 trillion level to allow the government to continue operating. The national debt has more than doubled since 2001, thanks to the worst recession since the 1930s, several rounds of tax cuts and wars in Iraq and Afghanistan. A looming wave of retirements over the coming decade is expected to make the situation worse.

The national debt [which excludes „non-marketable” debt issued to federal entities such as the Social Security Trust Fund] currently accounts for 53 percent of GDP, up from 41 percent a year ago. That’s likely to rise to 85 percent of GDP by 2018 and 200 percent of GDP by 2038 unless dramatic changes are made, the commission said.

The commission did not issue specific prescriptions but said tax increases and spending cuts would probably be needed.

It said Congress and the Obama administration should set specific targets each year, with automatic spending reductions and tax increases kicking in if they are not reached.

The Democratic-controlled Congress is unlikely to fix the problem on its own given the highly partisan atmosphere, commission members said. „You’ve got to have a few Republican votes, and there have been none. And there has been no possible way in the current political system yet to find that sensible center,” said former Democratic Representative Charlie Stenholm. The commission backed the creation of an outside commission, similar to one used to close miliary bases, to create the necessary political cover.

Such a proposal is included in a crush of year-end legislation that could clear Congress this week but it is opposed by many key Democrats.

The United States must act to ensure that it does not join Dubai, Greece, and other countries that risk losing the confidence of investors, the commission said.

„It’s imperative that we take action before the financial markets force us to,” said Douglas Holtz-Eakin, a former Congressional Budget Office director who advised Republican John McCain’s presidential campaign last year.

To be sure, short-term, crisis-related spending has played a key role in widening the hole in our nation’s finances, but it is not the only factor. Even before the current disaster struck, the long-term fiscal position of the U.S. was being undermined by reckless imperialism and the rapidly growing cost of entitlements. As an example of the latter, I cite the following chart, which illustrates the fact that net outlays for Medicare and Social Security now equal nearly eight percent of gross domestic product, a record high.

Furthermore, current spending on those two programs doesn’t even take acount of their overall long term costs. As detailed by the Peter G. Peterson Foundation in its „Citizen’s Guide 2009,” the present value of promised Social Security and Medicare payments not covered by taxes and other contributions is $42.9 trillion — or three times the size of our economy.

Worse still, even those estimates may be shy of the mark because Americans will apparently be living longer than previously thought. In „Rising Longevity: Can We Afford It?” Capital Gains and Games highlights the summary to an article in the latest issue of the Milbank Quarterly, „Aging in America in the Twenty-first Century: Demographic Forecasts from the MacArthur Foundation Research Network on an Aging Society,” which explores the degree to which current assumptions and forecasts may be understating the size of those obligations (assuming, of course, that benefits remain as they are):

Context: The aging of the baby boom generation, the extension of life, and progressive increases in disability-free life expectancy have generated a dramatic demographic transition in the United States. Official government forecasts may, however, have inadvertently underestimated life expectancy, which would have major policy implications, since small differences in forecasts of life expectancy produce very large differences in the number of people surviving to an older age. This article presents a new set of population and life expectancy forecasts for the United States, focusing on transitions that will take place by midcentury.

Methods: Forecasts were made with a cohort-components methodology, based on the premise that the risk of death will be influenced in the coming decades by accelerated advances in biomedical technology that either delay the onset and age progression of major fatal diseases or that slow the aging process itself.

Findings: Results indicate that the current forecasts of the U.S. Social Security Administration and U.S. Census Bureau may underestimate the rise in life expectancy at birth for men and women combined, by 2050, from 3.1 to 7.9 years.

Conclusions: The cumulative outlays for Medicare and Social Security could be higher by $3.2 to $8.3 trillion relative to current government forecasts. This article discusses the implications of these results regarding the benefits and costs of an aging society and the prospect that health disparities could attenuate some of these changes.