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Government Binge Spending

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As Washington’s attention has been focused on trillions of dollars in fixes for the current economic meltdown, some economists and budget watchdogs are warning of an even greater menace to the country’s financial health: the long-term budget crisis.

In the coming decades, the federal government has promised benefits to seniors, veterans and low-income families that, simply put, would bankrupt the U.S. Treasury. By 2050, Medicare, Social Security and other costly programs will expand the national debt to nearly three times the size of the economy, according to an analysis released yesterday by the Center on Budget and Policy Priorities, a liberal policy group.

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Debt-150x150_4525.jpg

Illustration by: Matt Mahurin

The White House this week issued a report revealing that the unfunded liabilities total more than $56 trillion over the next 75 years — up $3 trillion from just a year ago. Relative to this looming fiscal tsunami, experts say, the current downturn — and the bailouts aimed at fixing it — is a ripple. The question is not if lawmakers must tackle this crisis, but how and when. The longer they wait, the more severe the consequences will be — on beneficiaries and political careers alike.

On one issue, there is no debate: The government’s current spending habits are unsustainable. David Walker, head of the Peter G. Peterson Foundation, a fiscal watchdog group, said Monday that the $56 trillion is approximately the same as the net value of every household in the country. “It’s clear that America now owes more than its citizens are worth,” Walker said in a statement.

The projections arrive in the middle of a recession that’s forced the federal government to intervene in ways not seen since the Great Depression. In February, it was a $168 billion stimulus package. Then came rescues of Bear Stearns; American International Group; Freddie Mac and Fannie Mae; and in October, much of Wall Street was bailed out to the tune of $700 billion. None of the costs have been offset by cuts elsewhere in the budget.

All told, the government has offered $7 trillion to stabilize the economy, and another enormous stimulus deal will likely arrive early next year.

As big as it sounds, that figure pales relative to the unfunded long-term spending obligations currently on the books, most of which stem from the effects of skyrocketing health care costs on Medicare and Medicaid budgets. CBPP projects that the federal deficit, currently 3 percent of the country’s gross domestic product, would represent 21 percent of GDP by 2050. Over the same span, the debt would jump from 46 percent of the economy to 279 percent, CBPP reports. (The projections assume that Congress won’t allow the Bush administration’s 2001 and 2003 tax cuts to expire.)

Such a scenario would never happen. Why not? For one thing, the interest on the debt would be so high that there wouldn’t be much money left to fund the myriad programs that make the federal government tick. Yet changes won’t come easily. Because the budget crisis is caused largely by Medicare and Social Security, which run on autopilot, any solution will require Congress to make some tough choices — something lawmakers haven’t had much taste for.

From a policy standpoint the solutions are simple: Congress needs to cut benefits, hike cost-sharing for programs like Medicare, or raise taxes. The problem is, none of those fixes are politically palatable. Lawmakers simply don’t want to be remembered as the folks who slashed grandma’s prescription drug benefit.

To tackle the long-term budget crisis will take some work. CBPP estimates that it would require across-the-board tax hikes of 24 percent, or across-the-board program cuts of 20 percent (or some combination of the two) to plug the hole.

“No one wants to play with that political football,” said Tad DeHaven, a budget analyst at the libertarian Cato Institute.

Despite the urgency of the budget crisis, many economists are quick to warn that long-reaching budget reforms should come only after the economy has turned around. To try to balance budgets during the recession, many caution, would only exacerbate the downturn. “That would just kick the economy when it’s down,” said Richard Kogan, a CBPP economist.

President-elect Barack Obama has indicated that his first priority from the White House next year will be to tackle the sinking economy with emergency spending for public works projects, green energy initiatives and state Medicaid programs. Obama hasn’t put a price-tag on his proposal, but some observers say the package would have to approach $1 trillion to be effective.

Obama says his plan will create 2.5 million jobs while sustaining millions more. The trick for the incoming president and congressional lawmakers will be to find a way to pare down the deficit spending when the economy recovers without losing the jobs propped up by the stimulus binge.

That’s not an easy thing to do — particularly for lawmakers in the business of being liked. DeHaven questioned whether Congress has the resolve to cut back on spending after the recession.

“You’re raising the bar, so to speak, on federal expenditures for these activities,” he said. “Try to cut back and the special interests will emerge to gnash their teeth … People will forget that this was supposed to be temporary.”

In an email, Walker said the Obama administration has yet to provide a plan to ensure that the stimulus spending will be short-lived. Walker suggested “a Fiscal Future Commission that would be able to make recommendations regarding statutory budget controls, entitlement reforms, tax modifications, health care actions and other steps” to address the budget crisis.

The House Blue Dog Coalition — a group of conservative-leaning Democrats — is calling for a similar commission to be included in any stimulus legislation.

Some economists are optimistic that Congress will, after years of inaction, finally begin to tackle the long-term spending crisis next year. Robert Greenstein, executive director of CBPP, said “the specter” of $1 trillion annual deficits combined with yet another enormous stimulus package will “heighten the tension of the long-term fiscal situation” as lawmakers are struck with “sticker shock.”

Yet others are less hopeful that Congress has an appetite yet for budget reforms. DeHaven said that real changes probably won’t arrive until the crisis hits middle class Americans and “people are marching on Washington.”

“The casual dismissal of these numbers in the short-term and the long-term is just mind-boggling,” DeHaven said. “It probably won’t resonate with the American people until it hits them across the head with a two-by-four.”

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