20 Jan Entitlements

“America needs to cut entitlements.” – The Lonely Realist

America is sitting on a debt bomb. The date when it will detonate is unknown. The combustible elements continue to grow. When they reach critical mass, they will explode. Some say the detonation lies far in an unknown future, while others believe that the day of reconning is fast approaching. With America’s debt-to-GDP ratio currently at 122% (a record high even after omitting future obligations that push the ratio to >350%!) and its national debt exceeding $34 trillion, the megatonnage already is in place. America has financed the last 23 years of overspending by borrowing at a level so substantial that out-of-control debt growth cannot continue.

America’s politicians are averse to enacting necessary spending cuts and revenue enhancers. To the contrary, the two political parties over the last 23 years have agreed to do the opposite, increasing Federal spending, cutting taxes and gutting the tax collection process. The Committee for a Responsible Federal Budget reports that “77 percentage points of debt-to-GDP can be explained by legislation with some meaningful level of bipartisan support…. Federal debt held by the public [that is, excluding Social Security, etc.] grew from 32% of Gross Domestic Product (GDP) at the end of FY 2001 to 98% of GDP at the end of FY 2023.” The CRFB concluded that major tax cuts were responsible for 37% of debt-to-GDP, net discretionary spending increases and major Medicare expansions were responsible for 33%, and the Federal government’s bipartisan response to the Great Recession and the COVID pandemic accounted for 28%.

One consequence is that America’s national debt is increasing at an unsustainable rate of more than $2 trillion/yr., an annual deficit of ~7% of GDP that is unprecedented in non-recessionary peacetime. The rationale for excessive spending peddled to the public is Modern Monetary Theory (first discussed by TLR here), a philosophy grounded in the premise that debts and deficits simply don’t matter. They do! … and America’s politicians well understand this. They nevertheless persist in electoral dissembling with the hope that the debt bomb explosion is far enough in the future that it won’t affect their government sinecure. They have been right thus far. Detonation of America’s debt bomb does not appear imminent, although the bomb is growing in size day-by-day. Stein’s Law warns that “If something cannot go on forever, it will stop.” Today’s level of debt growth cannot go on forever. Some say America has a decade or more of breathing room, while others preach a nearer catastrophic ending. Either way, crisis lurks. Congress can begin to defuse the bomb …, or await a detonation that will have catastrophic consequences.

The way to balance a budget is by cutting spending and raising revenue. Congress should start with the debit side, reforming entitlement spending in a way garners bipartisan support. [ED NOTE: Congress also could elect to increase taxes, previously discussed here, although the impetus for doing so most likely will arise when 2017 tax measures sunset in 2025.] The potential for consensus exists. The U.S. currently provides support and safety nets for disadvantaged children, the elderly, the disabled, those living below the poverty line, and others – more than 15 programs that include Social Security, Medicaid, Medicare, food stamps, housing subsidies, household welfare payments, agricultural and corporate subsidies, tax incentives, etc., etc., etc. Each program in itself has been reasonably-targeted, but each also has created its own self-sustaining bureaucracy and, because each was legislated to raise living standards, there has been a fair amount of unintended overlap with a limited ability to monitor or reform duplicative services and payments. That alone has generated a belief that programs that otherwise benefit many Americans contain “fraud and waste.” That undoubtedly is true at a level, but difficult to address without damage to the programs themselves as well as increased bureaucratic oversight. In addition, each program has a “third rail” political dimension, not to be touched by politicians without electoral electrocution. Nevertheless, the longer Congress waits before addressing overlapping and cumulatively unaffordable entitlement programs (as well as other spending and revenue issues), the larger and more intractable the debt bomb will be.

TLR in April 2019 proposed adopting a form of Universal Basic Income (UBI) that would achieve entitlement simplification by substituting straightforward UBI distributions for complex entitlement programs, doing so on a cost-equivalent basis. Recent results from the world’s largest basic-income experiment provide confirmation that such a plan could/would increase productivity, enhance living standards, and reduce the size of government, a combination with appeal to America’s major political constituencies: Progressives, MAGAs, Democrats and Republicans. That recent success follows more limited, yet equally successful experiments in Finland, Stockton, Oakland and San Francisco. UBI is neither new nor a partisan or progressive concept, having been vetted in 1969 by President Nixon who rejected it not because of its lack of economic viability, but because of its political risk. Studies at the time concluded that UBI offered substantial upside, an upside that has been confirmed by results showing that recipients’ motivation to work is not reduced and budgetary costs are more than recouped through productivity gains. Although UBI continues to inspire an emotionally-charged negative reaction, the evidence is decidedly positive. Recent successes make it clear that America would benefit from UBI simplification that would consolidate the financial support provided by specified entitlement programs, thereby reducing fraud and, optimally, overlapping bureaucracies.

The fuse on America’s debt bomb is smoldering. No one knows when it will flare up and the bomb will detonate. Because a crisis is, as they say, a terrible thing to waste, there will come a time when Congress will be forced to address America’s unrepayable debts …, with unpleasant consequences. It would be far better for Congress to begin addressing the problem now. Offsetting specified entitlements with UBI would be an excellent place to start.

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Finally (from a good friend)