The Entitlement Quandary—Posner

Although I do not place any weight on long-term economic forecasts, there is no doubt that we face a growing burden of federal and state entitlement spending—“entitlement” signifying that expenditure levels are automatically financed, rather than having to be reauthorized every year as defense expenditures (and indeed all nonentitlement government expenditures) are. Government entitlement spending is concentrated on pensions and elder health care. Both forms of spending increase as a function of the growing percentage of elderly people in the population, and healthcare spending grows additionally because of increases in cost caused by new technologies plus the normal upward-sloping supply curve, implying that increases in demand for health care (because of the increasing number of elderly) cause a rise in average and therefore total costs.

 

Becker rightly adds to entitlement costs the cost of servicing government debt, since lenders to government have an entitlement to the repayment of their money with interest at the rate specified in the loan. Costs of debt service can easily grow at a compound rate, because the more the government borrows, the higher the interest rate it is likely to have to pay; instead of borrowing $1 billion at 5 percent interest, for a total annual interest expense of $50 million, it might have to pay 7 percent interest to borrow $2 billion, for a total annual interest expense of $140 million—which is more than twice the interest expense on a loan that is twice as large. Because of the United States’ huge public debt (the part of federal government debt that the government is contractually committed to repay), interest rates on the public debt are likely to rise, creating the compounding effect that I just illustrated.

 

I am less concerned about nonfederal government debt than about federal government debt. The nonfederal debt problem centers on public workers’ pensions, and public workers are of course a minority of all workers. Moreover, because states and cities cannot create money, and because they compete with other states and cities for businesses and people, they are compelled by market forces to restrict spending. The federal government’s entitlement obligations extend to the entire elderly population of the United States. And any commitment to federal fiscal prudence is diluted by knowledge that the United States can always inflate its way out of deficits or borrow at low rates as long as the dollar remains the principal international reserve currency, so that foreign nations have to buy dollars from us, which means have to lend to us.

 

Deficit projections are pretty worthless. At the beginning of 2007 the Congressional Budget Office, which has an inflated reputation but is at least nonpartisan, projected the federal deficit for fiscal 2010 at $333 billion (it will be at least four times that)—and that was a short-term projection. In 2001 it had predicted a 10-year budget surplus of more than $3 trillion. Its forecasts are largely just extrapolations, which assume that the future will be just like the past. All that can be said about future deficits with an approach to confidence is that if nothing is done they will grow, and that nothing is likely to be done until they grow to a point at which there is a palpable impact on the standard of living.

 

In 1983, Congress amended the social security act to provide that, for people born in 1938, the age of eligibility for full social security benefits would rise gradually from 65 to 67. (Hence the first effects of the reform were not felt until 2003, when people born in 1938 reached the age of 65, and the full effect will not be felt until 2026, when people born in 1959 reach 67—it is the deferral of the hurt that made the program politically feasible.) It is a sad commentary on our political system that there is no movement today for a similar reform, which would raise the future age of entitlement to full social security benefits to 70 in recognition of continuing increases in longevity, health, and income. We are in ostrich mode so far as dealing with our fiscal problems is concerned, even though the problems are far more serious than they were in 1983.

 

The basic problem is that our two political parties, although they pretend to be ideologically opposed and certainly do disagree on a number of details of public policy (many of which however are economically inconsequential), are agreed on the basics of fiscal policy: that taxes are bad and government spending is good. The Democrats used to believe that since spending was good, taxes had to be heavy, and Republicans that since taxes are bad, spending had to be limited so that taxes could be low. Eventually the parties discovered from election results that taxes are unpopular and spending popular, so Democrats stopped pushing for higher taxes (except on very high earners) and Republicans for lower spending. Both parties have embraced fiscal irresponsibility.

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[Melese]

R.G.:The song by "The Nevers" is called "Every Inch." Alas, it's from an ulerneased demo that I got from Paul Noe, their bass player. (Also a former Judybat, and Doubters' Club member). I don't think it's available anywhere, alas.

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[Edy]

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