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Tuesday, February 05, 2008

"Does America Have a Budget Problem?"

Free Exchange on the federal debt:

Does America have a budget problem?, Free Exchange: ...[T]here's a new federal budget proposal out with a whopper of a deficit figure--$410 billion for 2008. ... Greg Mankiw writes in the New York Times that his ... birthday wish is a world where we didn't bequeath large debts to our children. ...

He is absolutely correct that we face a rather troubling budget picture. Unfortunately, he misses the mark in describing ... the situation... Mr Mankiw's first great omission is in focusing his column entirely on entitlement spending. Mr Bush's budget increases defence spending by at least 7.5 percent (and one never knows what further appropriations may be required) to a total of $515 billion. That marks the 11th year in a row in which defence spending has increased. Perhaps ... it is time to discuss whether budget cutting zeal ought to be turned exclusively toward entitlements.

And what about that aging population? ... Mr Mankiw writes:

Because people are having fewer children and living longer than past generations, the number of working-age people supporting each elderly person has fallen and will continue to fall.

But as Bryan Caplan noted..., the fact that people are having fewer children is also a positive when considering the dependency ratio. Workers will have more retirees to support in the future, but they'll also have fewer children to support. In other words, the total number of people a worker needs to support on average should not be overly burdensome.

Mark Thoma complains that Mr Mankiw has not done enough to differentiate Social Security among the problems discussed in his piece. He hasn't... There is Social Security, for which long-term solvency is not a significant problem, and there are Medicare and Medicaid, for which growing expenses are a serious issue. ... The problem with Medicare and Medicaid isn't so much a demographic one as a per capita health expenditure one. This implies a different solution set. For one thing, whether health insurance is provided privately or publicly, costs will continue to grow. In other words, reducing government payouts isn't going to fix the problem.

What will? For those of you interested in health insurance policy, there is an interesting debate taking place on a recent paper by John Gruber comparing the use of subsidies versus mandates to achieve full coverage. Not surprisingly, mandates are cheaper from a financial standpoint, but perhaps not from a social standpoint (the act of forcing someone to enroll in a program reduces the program's cost, but imposes a social cost on the enrollee).

In general, we should recognise that the generational issues involved in the budget are substantial, but they aren't the chief challenges we face. The tough questions involve our commitment to a constantly enlarging defence budget, the growth of health care costs, and the ways in which those items ought to be balanced in a sustainable budget. Mr Mankiw skirts this formulation, but the next administration and Congress will not be able to.

Assuming that the military budget as a share of GDP will not continue expanding indefinitely, one issue in particular, health care costs, threatens the progressive agenda in the future. If we don't reign in the costs of health care somehow and/or find additional revenues, the budget will come under considerable pressure and there's no telling for sure how such pressures would be resolved or what programs would be reduced or eliminated. I'm sort of doubtful that the pressures on the health care system have mounted enough yet to bring about the necessary change during the next administration, though I hope I'm wrong about that, but if projections are correct the time will come when something will need to be done. When it does, will Democrats be ready? That's what worries me about moving too soon. If Democrats win the election and try for fundamental reform only to be shot down in flames once again, does that poison the well for the time when problems are evident and people are ready for and demanding change, or could it actually work in Democrats favor as people look back and realize they were right all along?

    Posted by on Tuesday, February 5, 2008 at 03:06 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (39)

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