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Economic Disaster Looms Behind Federal Spending

Image has not been found. URL: /wp-content/uploads/2008/09/gregg-conrad.jpgSens. Kent Conrad (D-ND) and Judd Gregg (R-NH), WDCPix

A quick glance around the Capitol this week reveals a Congress consumed by their temporary plan to boost the flailing economy. But even as party leaders haggled over their stimulus strategy, some of the nation’s top economists warned that America’s long-term spending trends present a far larger financial crisis.


Illustration by: Matt Mahurin

With the first baby boomers already retiring, much attention has been given to the future strain on Social Security. The larger problem, however, is the rising cost of health care. As a share of the nation’s gross domestic product, health spending was 8.4 percent in 1976. Three decades later, the figure had almost doubled to 16 percent — and it’s rising quickly.

Peter Orszag, director of the non-partisan Congressional Budget Office, told a Senate panel Thursday that, at current rates of increase, health spending would represent more than 40 percent of GDP by 2050. Those costs, Orszag said, are being driven by new technologies, such as pharmaceuticals and medical devices. But there are also dramatic regional cost differences that are contributing as well.

Researchers at Dartmouth College, for example, found that the cost to treat a patient in the last six months of life was about twice as much at UCLA’s Medical Center versus Minnesota’s Mayo Clinic — with no notable gain from the additional expense. “Taxpayers are paying for that difference,” Orszag said.

Demographics are also playing a role, as the first baby boomers will become eligible for Medicare in three years. Already, the gap between projected revenues and promised benefits — including Medicare, Social Security and veterans’ programs — puts the country roughly $53 trillion in the red, according to U.S. Comptroller General David Walker.

“We must not be deluded to think that our main problem is in the short term,” Walker said. “Because, quite frankly, we’ll have much, much, much bigger economic challenges in the future if we don’t deal with our real problem.”

A few congressional leaders have jumped headfirst into the debate, but they remain a stark minority. Senate Budget Committee leaders Kent Conrad (D-N.D.) and Judd Gregg (R-N.H.), for example, have proposed a bipartisan task force that would make reform recommendations to Congress, which would then have a short window to vote on the proposals. For the strategy to be effective, the Budget Committee leaders argue, all reforms must be on the table, including tax hikes and benefit cuts. Conrad said he plans to force a committee vote on the bill this year — even in the face of some members’ objections.

“I am sorry if that causes discomfort to some of my colleagues,” Conrad said, “[but] this can cannot be kicked down the road again.”

Much of the reluctance to act is political, for few lawmakers want to be remembered for raising taxes or cutting benefits for constituents. This is especially true in a contentious election year.

Richard Kogan, a senior fellow at the left-leaning Center on Budget and Policy Priorities, said there would be no sweeping changes to federal spending patterns until the crisis grows more tangible — and voters are willing to sacrifice in response. “You can’t do the right thing,” Kogan said, “until you’ve got candidates who can win by doing the right thing. I think you have to wait for a new electorate.”

At least part of the problem is that Congress no longer has any control over much of the federal budget. Discretionary spending, which lawmakers dictate, represents only 38 percent of the current budget, Walker said. The remaining 62 percent goes to entitlement programs and other initiatives that run on autopilot, including interest on the national debt. That trend, Walker said, has stolen much of the power — and purpose — of Washington policy-makers.

“If you read the Constitution of the United States,” he said, “you will find that every expressed and enumerated responsibility envisioned by the founding fathers for the federal government is in discretionary spending.”

The White House has entered into the spending debate as well. During his State of the Union address Monday, President George W. Bush announced a cap on the amount of earmark spending he will tolerate before vetoing appropriations bills. A day later, he issued an executive order directing all federal agencies to ignore any earmarks found in the reports that often accompany legislation, but not in the legislation itself.

Still, critics say, Bush’s new-found fiscal conservatism is hypocritical, particularly in light of the trillions of dollars in new debt accumulated over his tenure.

Meanwhile, the stimulus package now working its way through Congress, some economists warn, will only exacerbate the long-term spending problem. Jagadeesh Gokhale, a senior fellow at the libertarian Cato Institute, said the stimulus strategy — which borrows from abroad with hopes of keeping retail spending high — is sure to backfire.

“We are borrowing against future generations’ incomes,” Gokhale said. “The policy shouldn’t be to give money to people to consume, it should be to give money to people to invest.”

Ralph Bryant, a senior fellow at the Brookings Institution, agreed with at least a part of that assessment. “It’s bad for the country’s long-term welfare,” Bryant said about the borrowing. “I don’t think there’s any question about that. But insofar as it keeps the country from falling into a long-term recession, it’s worth doing.”

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