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Real Fiscal Responsibility & Deficit Politics: Introduction

[digg-reddit-me]Last week I wrote a semi-irresponsible post about how Republicans are waging a generational war* by opposing fiscally responsible health care legislation. It was a variation on the common refrain from the right that all sorts of government programs are in fact “generational theft.” This memorable phrase was coined by John McCain to describe the stimulus bill, but there is nothing in principle to distinguish it from all deficit spending.  Bill Frezza writing in Real Clear Markets in a more recent example of this right wing meme called Social Security “a Ponzi scheme” which in which the younger generations are being screwed. The general message of the “generational theft” meme is that the young shouldn’t expect to benefit from government spending – but should only see it as a burden.

Few would dispute that it is my generation that is being screwed if our current policies remain in effect. The deficit we face now is big but manageable. But the real reason we are being screwed is that the projected deficits are not manageable, specifically because of the rising costs of Medicare. (Graph source: CBO.)

We know that projected spending is unsustainable: so the question moves to why has this issue not been addressed? To answer that, you need to look at who benefits from the status quo and wants to protect it. The federal budget and tax system consists primarily these components:

  • Entitlement spending on the elderly, mainly Medicare and Social Security, which together represent the largest projected expenditures of the federal government. (For 2010, Medicare about $453 billion and Social Security about $695 billion.)
  • Military spending. (For 2010, $664 billion. Or as commentor John Rose points out, including non-DOD military spending, the total would come to somewhere in the $900 billion range.)
  • Medicaid and other aid to the poor. (For 2010, $290 billion on Medicaid; some portion of the $571 billion in “other mandatory spending.”)
  • Interest on the debt. (For 2010, $164 billion.)
  • Subsidies to corporations in the form of tax loopholes which makes our effective corporate tax rate among the lowest in the world (even while the nominal rate is among the highest.) Also, more traditional subsidies to large corporations in favored industries, specifically agriculture. (More than $75 billion on tax subsidies; some portion of the $571 billion in “other mandatory spending.”)
  • Education and infrastructure. (Combined, for 2010, about $120 billion, plus some portion of the $571 billion in “other mandatory spending.”)

People of all political stripes acknowledge the approaching fiscal apocalypse, but each party’s responses and proposed solutions have been shaped by their core constituencies and their ideology.

The next two posts will explore each party’s approach in more depth, but in short:  Republicans, believe government is the problem; yet as the currently elderly, along with big corporations and the military are core interest groups and the primary beneficiaries of the status quo, they implicitly propose a deal whereby they maintain the status quo today – and then eliminate or drastically reduce entitlement spending on future elderly, the young Democrat-voting generation now, as well as, presumably, shrinking the government by eliminating other spending programs that do not benefit their interest groups.

The Democrats meanwhile, believing government programs can work, propose a three-step approach culminating in a “grand bargain,” to finesse the issue:

  1. Get the GDP growing again. A growing economy expands the tax base and reduces welfare spending, and – most important – reduces the size of the deficit in relation to the economy making it easier to pay off.
  2. Curb the growth in health care costs – thus alleviating the biggest factor leading to the explosion of the deficit.
  3. With these two factors relieving pressure, strike a Grand Bargain. Either through a technocratic commission or through bipartisan legislation, push through some combination of taxes and adjustments to current programs to make them sustainable.

Both of these plans are risky. But any path we choose now will be risky – due to the incredible and seemingly deliberate starve-the-beast-style (see next post) fiscal irresponsibility of George W. Bush’s administration, coupled with a downturn and the looming fiscal crisis.

Part 2 on the Republican approach found here. Parts 3 and 4 discussing the Democratic approach and then lessons from this moment of “welfare scleroris/imperial overstretch” coming tomorrow and Friday.

*I know that’s a bit unfair, a bit too pithy to be true. But the simple messaging – the oversimplification – can be a useful tool to get people to think if it is not used to reinforce the conventional wisdom. All too quickly, using such an oversimplified scheme, one can come to the wrong conclusions – which is part of the reason George Orwell in his “Politics and the English Language” stressed using original phrases. The first time one encounters such a phrase – it can prompt thought. But all too quickly, it solidifies into dogma and ideology.

[Image by Vermin Inc licensed under Creative Commons.]

18 replies on “Real Fiscal Responsibility & Deficit Politics: Introduction”

I would dispute the “Military spending. (For 2010, $664 billion.)”. There’s an additional ~$186 billion/year in discretionary spending if you take into account defense spending within the budgets of the FBI, NASA, the State Department, Veteran’s Affairs, Homeland Security, and the Energy Department. Then an additional $49 billion/year in mandatory spending for military pensions. (http://en.wikipedia.org/wiki/Military_budget_of_the_United_States#Defense-related_expenditures_outside_of_the_published_Department_of_Defense_budget)

So the real number is somewhere around $900 billion/year.

And the subsidies we give out via corporate tax loopholes and subsidies are significant, but not nearly as large as other tax deductions, which go primarily to upper-middle and upper class households. Combine the health care deduction, property tax deduction, and mortgage interest tax deduction, and you’re talking about $315 billion/year in tax deductions, compared to ~$20 billion in corporate tax loopholes and ~$30 billion for agricultural subsidies.

@John Rose –

Edited the military number to reflect your comments.

The number I pulled from Cato (which I linked to) was $75 billion in corporate subsidies including tax and spending – but it was from 1997 and I didn’t find updated figures, so it seems reasonable to presume the number would be significantly larger today.

In terms of other tax deductions for middle class and upper class households: I would add the various student loan programs to that list. I planned on putting that into this list, but wasn’t able to find any good sources on the totals.

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