Monthly Archives: October 2013

America’s Entitlement Budget Disaster

Washington has again become a battleground as the President refuses to compromise with Republicans, who want to amend Mr. Obama’s signature legislative piece, the Affordable Care Act, which they maintain is a budget-breaker. But it is this just another political skirmish, or is it a philosophical battle between two sets of beliefs so fundamentally different that they cannot be reconciled?

IS THE CURRENT BUDGET COURSE SUSTAINABLE?

The President, and many in the Senate, maintain that they were elected due in part to promises made about abundant spending for entitlement programs. The Affordable Care Act alone adds about $1.8 trillion in spending by 2023.

Republicans believe that there is abundant evidence that the current course of federal budgets is unsustainable.

According to the Government Accountability Office,”GAO’s simulations lead to an overarching conclusion: current fiscal policy is unsustainable over the long term. Absent reform of federal retirement and health programs-including Social Security, Medicare, and Medicaid-federal budgetary flexibility will become increasingly constrained. Assuming no changes to projected benefits or to revenues, spending on these programs will drive increasingly large, persistent, and ultimately unsustainable federal deficits and debt as the baby boom generation retires.”

The Congressional Budget Office concurs with this worrisome analysis:

“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy … Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely…

Under the extended baseline, budget deficits would rise steadily and, by 2038, would push federal debt held by the public close to the percentage of GDP seen just after World War II-even without factoring in the harm that growing debt would cause to the economy.

By 2038, CBO projects, federal spending would increase to 26 percent of GDP under the assumptions of the extended baseline, compared with 22 percent in 2012 and an average of 20½ percent over the past 40 years. That increase reflects the following projected paths for various types of federal spending if current laws generally remain in place …
• Federal spending for the major health care programs and Social Security would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years.
• In contrast, total spending on everything other than the major health care programs, Social Security, and net interest payments would decline to 7 percent of GDP, well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.
• The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years, mainly because federal debt would be much larger…”
The National Debt is approaching $17 trillion dollars. The 2013 budget deficit is clocking in at over $800 billion.

The Federal Reserve, as noted by Forbes, has attempted to delay the drastic result of this imbalance by printing more currency ($85 billion per month, 6% of GDP annually; since 2007, the money supply has been increased by a factor of 4X!)

The annual deficits are not the result of a lack of revenue.

In the past 11 months, Washington collected $2,472,542,000,000-a record high, and an increase of $285 billion from the same time period the prior year. Nevertheless, the federal government still incurred a $755 billion deficit.

A Heritage Foundation analysis reveals that “total spending has increased 40 percent since 2002, even after inflation… Defense, however, has been slashed. Obamacare will add $1.8 trillion to federal health care spending by 2023.” The study notes that the President’s budget, which would increase spending in his second term by $335 billion, never balances, even with a $1.1 trillion tax increase stretched over a decade. Mr. Obama proposed $7 in tax increases for every $1 in spending cuts, and those cuts don’t occur until 2018, when he has already left office.

The dramatic growth in spending comes from federal programs that are not central to the traditional governance activities of the nation.

According to the American Enterprise Institute:

“The rate of entitlement growth per capita has been nearly twice as fast as per capita income growth for the last fifty years…In the 1960s, the federal government spent $2 on governing for each $1 it spent on entitlement transfers. Today that ratio has completely flipped… In 1969, government benefits accounted for 7.8% of Americans’ personal income. In 2009, government benefits accounted for nearly 18% of Americans’ income. And the regions which relied most on benefits in 1969 have become even more dependent. Nearly 50% of the U.S. population lives in a household that receives some government benefits. 31% of US households are receiving means-tested public benefits.”

“We’ve become so used to these unfathomable levels of deficits and debt-and to the once-rare concept of trillions of dollars-that we forget how new all this debt is. In 1981, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 33 years later, it’s headed past $17 trillion. Traditionally, the national debt as a percentage of GDP rose during major wars and the Great Depression. But there’s been no major war or depression in the past 33 years; we’ve just run up $16 trillion more in spending than the country was willing to pay for.”
-CATO Institute

In Part one of this analysis, we reviewed the extraordinary financial crisis the U.S. government currently faces. The problem is not the result of a lack of revenue, which is at an all-time high. It is the product of excessive spending on entitlements.

SKYROCKETING ENTITLEMENTS,
BUT POVERTY REMAINS UNCHANGED

The Congressional Research Service
has estimated that federal welfare programs will grow almost 80% over the next decade. Already, entitlement spending, which has increased 41% since President Obama first took office, is at unaffordable levels.

This is not a pragmatic attempt to assist the poor, according to the Tax Foundation. According to that organization’s research, “Redistribution is ultimately at the heart of all tax and spending debates in Washington. But lawmakers are doing the public a great disservice if they fail to talk in honest terms about who currently pays for government programs and services, who benefits, and how new policies will change that balance.”

CATO’s new study has found that:

“…a family collecting welfare benefits from seven common programs could receive more than someone in a minimum-wage job in 35 states …roughly 60 percent of Americans receive more in government benefits than they pay in taxes… because of policies put in place by President Obama, as many as 70 percent of Americans are now net recipients of government largesse.”

Less than 40 percent of federal transfer payments-from 126 individual “anit-poverty programs” costing $688 billion annually– are actually going to those classified as “poor.” CATO concluded that “welfare spending appears to have little effect on poverty rates.”

Entitlement spending growth is shocking. A 2012 U.S. News analysis
found that entitlement spending has grown by an explosive 9.5 percent per year for 50 straight years.

“Entitlement transfer payments to individuals …have been growing twice as fast as per capita income for 20 years, totaling $2.2 trillion in 2010 alone…In 1960, entitlement spending accounted for less than a third of all federal spending; in 2010, it was just about two thirds of government outlays, with everything else-defense, justice, all the other duties of government-making up less than one third.”

A Forbes editorial provided an illustration of the explosive growth in health care costs:

“In absolute dollar terms, federal health spending in the last year of the Clinton administration was 75 percent higher than in the last year of President George H.W. Bush, while Medicare spending was two-thirds higher.”

Because of this, according to fiscal policy expert Dan Mitchell, “the long-term position of the United States is worse than either Greece or Portugal.”

In testimony before the Congressional Budget Committee last year, Heritage researcher Robert Rector noted:

“Although the public is aware that Social Security and Medicare are large expensive programs, few are aware that for every $1.00 spent on these two program, government spends 76 cents on assistance to the poor or means-tested welfare.

“… In FY2011, federal spending on means-tested welfare came to $717 billion. State contributions into federal programs added another $201 billion, and independent state programs contributed around $9 billion. Total spending from all sources reached $927 billion.

“About half of means-tested spending is for medical care. Roughly 40 percent goes to cash, food, and housing aid. The remaining 10 to 12 percent goes what might be called “enabling” programs, programs that are intended to help poor individuals become more self-sufficient. These programs include child development, job training, targeted federal education aid and a few other minor functions.

“The total of $927 billion per year in means-tested aid is an enormous sum of money. One way to think about this figure is that $927 billion amounts to $19,082 for each American defined as “poor” by the Census. However, since some means-tested assistance goes to individuals who are low income but not poor, a more meaningful figure is that total means-tested aid equals $9,040 for each lower income American (i.e., persons in the lowest income third of the population).

“If converted to cash, means-tested welfare spending is more than sufficient to bring the income of every lower income American to 200 percent of the federal poverty level, roughly $44,000 per year for a family of four. (This calculation combines potential welfare aid with non-welfare income currently received by the poor.)…

“In the two decades before the current recession, means-tested welfare was the fastest growing component of government spending. It grew more rapidly that Social Security and Medicare and its rate of increase dwarfed that of public education and national defense. While means-tested medical benefits have been the fastest growing part of the welfare system, most other forms of welfare aid have grown rapidly as well.

“For example, spending on means-tested cash, food and housing has grown more rapidly than Social Security over the last two decades. Adjusting for inflation and population growth, the U.S. now spends 50% more on means-tested cash, food and housing than it did when Bill Clinton entered office on a promise to “end welfare as we know it”. It comes as a surprise to most to learn that the core welfare state has expanded dramatically since reform allegedly “ended welfare” in the mid 1990’s.

“Total means-tested spending on cash, food and housing programs is now twice what would be needed to lift all Americans out of poverty. Why then does the government report that over 40 million persons live in poverty each year? The answer is that, in counting the number of poor Americans, Census ignores almost the entire welfare state: Census counts only a minute fraction of means-tested cash, food and housing aid as income for purposes of determining whether a family is poor…

“Despite the fact that welfare spending was already at record levels when he took office, President Obama has increased federal means-tested welfare spending by more than a third. Some might this is a reasonable, temporary response to the recession, but Obama seeks a permanent, not a temporary, increase in the size of the welfare state…”

Facing pressure to pay for skyrocketing entitlement costs, The United States defense budget will, under current planning, be slashed by lawmakers an extra $500 billion over the next ten years, in addition to the $487 billion cut already adopted. This comes at a time when Russia and China, who are now actively participating in joint war training exercises, have sharply escalated their spending, and when their client states Iran and North Korea continue to develop significant nuclear capabilities.

State governments, as well, are having a difficult time dealing the additional burdens of unfunded mandates brought about by significantly increased entitlement programs.

STATES REBEL AGAINST UNFUNDED MANDATES FOR ENTITLEMENTS

The United States Census Bureau has reported that state government tax collections increased $34.3 billion from fiscal year 2011 to a record $794.6 billion in 2012. Forty-seven states saw an increase, led by North Dakota (47%) Alaska (27.3%) Illionois (19.1%) and Connecticut (15%.)

Despite the record haul, unfunded federal mandates for entitlements remains a clear danger to the fiscal health of the states. Nebraska’s Gov. Dave Heineman has made explicitly clear the state of Nebraska cannot afford more unfunded federal mandates from Washington, D.C. According to an Americans for Prosperity report, The Affordable Care Act is “a massive new unfunded mandate on the states in the form of medicaid expansion and new bureaucratic programs like health care exchanges.”Obamacare provides an unfunded mandate requiring higher spending by state taxpayers in order to expand Medicaid.

The American Legislative Exchange Council, has suggested the following “model resolution” for state governments:

WHEREAS, the growth in federal spending of the Medicaid and welfare entitlements are astronomical and spiraling, significantly increasing the federal budget costs, and
WHEREAS, this growth will never be controlled unless the states have autonomous management of the programs, free from Federal mandates regarding individual entitlement, eligibility groups, benefits, payment rates, and financing structures to allow most citizens of the states to benefit from the Medicaid and welfare programs, and
WHEREAS, the states will be able to design and develop innovative, efficient and productive Medicaid and welfare programs that will meet the needs of the residents within the state of {insert state}’s budget capacity, and
NOW THEREFORE BE IT RESOLVED, that the legislature of the state of {insert state} urges Congress to pass federal funds on to States via block grants to be used for public welfare and Medicaid purposes, and
BE IT FURTHER RESOLVED, that copies of this resolution will be distributed to all Governors and members of the U.S. Senate and the U.S. House of Representatives.

DEFENSE SPENDING CUT TO PAY FOR INCREASED ENTITLEMENT SPENDING

The extraordinary impact of entitlement spending can be seen most clearly when comparing it to perhaps the most basic and essential federal endeavor: national defense.

Chris Conover, has noted that “[currently] Washington spends $50 billion less on defense than the outgoing secretary of defense said was the bare minimum needed.”

A 2012 U.S. News analysis emphasized that “government spending on entitlements not only exceeds defense spending these days, it completely overwhelms it. In 2010, America spent well over three times as much on transfer payments to individuals than it did on its entire national security budget-including on both wars in Iraq and Afghanistan. If current trends continue under President Obama, entitlement spending is set to increase by more than $700 billion over the next four years; the current national cost of all defense and security programs is roughly $700 billion as well. That means it will take only one presidential term … for the growth of entitlement spending to absorb the entire defense budget of the United States.

According to the Congressional Budget Office, because the inflation-adjusted costs of DoD’s plan will rise over time much more rapidly than the budget caps will, the reductions that DoD will have to make relative to its 2013 plan to comply with the caps will be larger in later years (see figure below). From 2018 through 2021, the caps will be about 12 percent below an extrapolation of DoD’s five-year plan and 19 percent below CBO’s projection of the cost of that plan.

The Foreign Policy Initiative notes that under current law, the defense cuts that will automatically take place will be, according to both civilian and military leaders, “devastating and high risk.”

In a CNN interview earlier this year former Secretary f Defense Leon Panetta warned of “the most serious readiness crisis” faced by the armed forces in over a decade. And a “serious disruption in defense programs and a sharp decline in military readiness.”

A Manhattan Institute study of federal budget issues found that:

“The fundamental problem in the federal budget is the relentless increase in entitlement spending. … Over the past four decades, the federal government has collected revenue that has averaged 18 percent of GDP annually. In 1972, when total spending on Social Security, Medicare and Medicaid was 4.4 percent of GDP, there was plenty of revenue left over for other priorities of government, like national security. But today, the situation is very different. [a reduction in military spending would make sense could] … only occur if a highly unusual period of tranquility suddenly materialized across the globe. If, on the other hand, the next decade in world history is more like what it has been for millennia, then it would be both financially foolish and utterly irresponsible to claim credit for a fictitious “peace dividend” in outyear budget projections. But, of course, that’s exactly what the Obama budget does to make the deficit forecast look better than it really is.”

Unlike cuts to entitlements, cuts to defense have profoundly negative impacts on the economy. Defense manufacturing produces high paid employment at a time when unemployment is rampant and well-paid jobs are increasingly scarce. According to former Navy Secretary John Lehman, quoted in a Thinkprogress article, “Defense cuts particularly hurt the economy… because defense spending creates more jobs and growth per dollar than entitlements, such as Medicare, Medicaid, and Social Security. “If your objective was to maximize jobs, you’d cut entitlement five times more than defense.”

Of course, cutting defense has implications far beyond the economy. A Reuters report quotes defense manufacturers calling the cuts “irresponsible” and “dangerous.”

CONCLUSION

The extraordinary increase in entitlement spending has not reduced poverty in America. In fact, by removing dollars from the private sector as well as other federal efforts that are more productive in producing either employment or traditional and vital services, it has set in motion a cycle of ever-increasing need addressed by ever-increasing spending. This cycle has reached a critical stage where severe harm to the prosperity and safety of the nation can occur.