There certainly is a difference between pink unicorns and spending cuts

White House/Pete Souza

President Barack Obama and Vice President Joe Biden meet with House Speaker John Boehner and House Majority Leader Eric Cantor in the Oval Office to discuss ongoing efforts to find a balanced approach to the debt limit and deficit reduction, July 20, 2011.

Article Highlights

  • Without structural reforms to cut spending, Social Security & Medicare will consume 14.4% of GDP in 2052 by themselves.

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  • The GOP & Democrats must play nice, accepting that they have to eat their veggies to have dessert. #entitlementreform

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  • The difference between pink unicorns and serious spending cuts is that we know serious spending cuts are real.

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  • Some believe immediate spending cuts are preferable to future cuts. This is a misunderstanding of our budget problems.

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  • The growth of federal spending is coming from entitlements. Entitlement reform is what’s needed. @MichaelRStrain

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House Republicans were wise to suspend the debt ceiling until the middle of May, effectively resequencing the series of upcoming fights over the federal budget. They are now poised to make their stand in March, using pressure points provided by the sequester - the across-the-board cuts to defense and non-defense discretionary spending - and the expiration of the stopgap measure currently used to fund the government.

Both fights are much preferable to a battle over the debt ceiling - the House Republicans would have erred in using the threat of government default as leverage to enact spending cuts. But the House Republicans should use the events of March to try to force a deal that restrains federal entitlement spending, even if it means accepting some additional revenue from tax reform.

There are some on Capitol Hill who believe that immediate spending cuts (like those in the upcoming sequester) are preferable to future cuts generated by reforming the structure of our entitlement programs. This preference suggests a serious misunderstanding of our budget problems.

In 1972, the federal government spent 13.8 percent of GDP on categories other than net interest, healthcare (e.g., Medicare and Medicaid), and Social Security. Forty years later, in 2012, that spending had fallen to 11.6 percent of GDP. And it is projected to continue to fall in the decades to come. Non-entitlement spending isn't the problem.

In contrast, Medicare, Social Security, and other health-related federal spending are about 10.4 percent of GDP, up significantly from 8.1 percent of GDP only a decade ago. The non-partisan Congressional Budget Office forecasts that in 2052, in the absence of structural reforms to cut spending, Social Security and Medicare will consume 14.4 percent of GDP by themselves. Throw in other health-related spending (including Obamacare) and these categories alone account for well over eighteen percent of GDP - about two-thirds of projected total (noninterest) federal spending.

In other words, the growth of federal spending is coming from entitlements. Entitlement reform is what's needed.

It is difficult to imagine that serious entitlement reform can occur outside of a bipartisan agreement. Republicans and Democrats are going to have to play nice, each accepting that they have to eat their vegetables in order to have dessert. Specifically, Republicans will likely need to accept increased tax revenue through base broadening, and Democrats will need to accept less federal spending on Social Security and Medicare. The overwhelming driver of our long-term problem is entitlement spending, not revenue. But such a bipartisan deal - which will be very difficult to reach - will involve trading a bit of base broadening for a lot of entitlement reform.

A prominent belief among many Republicans is that such a deal, even if passed, cannot be enforced over time. This view is mistaken.

A champion of this view is Grover Norquist, president of Americans for Tax Reform (ATR). Mr. Norquist frequently argues that "grand bargain"-type deals are foolish because Democrats always find a way to undo or undermine spending cuts, recently asserting that "if you put taxes on the table, you never get spending restraint." Asked whether he would trade tax increases for significant spending reductions, he replied, "If there were such things as pink unicorns, what would I trade for them?"

The difference, of course, between pink unicorns and serious spending cuts is that we know serious spending cuts are real. How do we know? Because spending has been cut in the past.

And not in the mythical past. In the 1983 Social Security reforms, to be precise. The deal signed by Ronald Reagan delayed the scheduled June 1983 cost of living adjustment for half a year. And it gradually increased the eligibility age for unreduced benefits from 65 to 67. The increased eligibility age has stuck so far, and nobody is trying to undo it.

Mr. Norquist has a point about deals to restrain discretionary spending - because these spending levels are revisited each year, it is very difficult to make long-term deals stick. But discretionary spending isn't the issue. We need to cut spending by changing the underlying structure of our entitlement programs: Medicare, Medicaid, and Society Security. We need to do things in the spirit of raising eligibility ages and slowing the growth of benefit payments. The Social Security reforms of 1983 are significant because they are exactly the kinds of spending cuts that are most needed.

Republicans should be encouraged that structural reforms have been legislated in the past, and that the reforms have stuck. Republicans would be foolish to let the rhetoric of Mr. Norquist and others deter them from pursuing entitlement reform in the context of a grand bargain. Contrary to the protestations of many Republicans, We. Have. Done. It. Before. And we need to do it again.

Even Mr. Norquist's organization understands this in principle. In an email to my AEI colleague Ramesh Ponnuru, the director of tax policy at ATR, Ryan Ellis, acknowledged the "distinction between vague and ultimately unenforceable discretionary spending cuts on the one hand, and a defined Social Security benefit formula change on the other. The latter is far, far easier to see through."

Indeed. Seeing the deal through will be far, far easier than reaching a deal in the first place. But such a deal offers the best hope for restraining long-term federal spending.

Michael R. Strain is a research fellow at the American Enterprise Institute.  Follow him on Twitter @michaelrstrain.

 

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About the Author

 

Michael R.
Strain
  • Michael R. Strain is a resident scholar at the American Enterprise Institute, where he studies labor economics, public finance, and applied microeconomics. His research has been published in peer-reviewed academic journals and in the policy journals Tax Notes and National Affairs. Dr. Strain also writes frequently for popular audiences on topics including labor market policy, jobs, minimum wages, federal tax and budget policy, and the Affordable Care Act, among others.  His essays and op-eds have been published by National Review, The New York Times, The Weekly Standard, The Atlantic, Forbes, Bloomberg View, and a variety of other outlets. He is frequently interviewed by major media outlets, and speaks often on college campuses. Before joining AEI he worked on the research team of the Longitudinal Employer-Household Dynamics program and was the manager of the New York Census Research Data Center, both at the U.S. Census Bureau.  Dr. Strain began his career in the macroeconomics research group of the Federal Reserve Bank of New York.  He is a graduate of Marquette University, and holds an M.A. from New York University and a Ph.D. from Cornell.


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