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Robert Samuelson

Thinking Small on The Budget

By Robert J. Samuelson
Friday, April 22, 2005; Page A17

The Brookings Institution, one of Washington's prestigious think tanks, issued a study the other day on solving the nation's budget problems -- a study that paradoxically helps explain why we don't fix them. The authors, all prominent policy wonks, would surely protest that they are among the loudest advocates of addressing the budget stalemate. True. But the way they go about it makes the stalemate more, not less, likely to continue.

Let me say that in many ways "Restoring Fiscal Sanity 2005" is a swell report. It's a lucid and fact-filled budget primer. Here's one instructive fact: About 70 percent of Medicaid spending goes to the aged, disabled and blind. Medicaid is federal-state health insurance for the poor, and although it's usually described as benefiting poor mothers and their children, its spending stems heavily from nursing home care for the poorest elderly and almost-elderly who are "disabled."

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The report proves, if proof were needed, that an aging society is the central budget problem and that almost everything else is a footnote. Indeed, the report usefully shows that, depending on how rapidly health costs grow, the budget outlook goes from abysmal to catastrophic.

Driven by new medical technologies, annual health spending has increased about 2.5 percentage points faster than national income (gross domestic product) since 1960. The upward advance has defied numerous efforts to control costs. Standard budget projections assume that growth in health spending will slow to "only" one percentage point higher than GDP growth. If that happens, spending on Medicare -- health insurance for people 65 and older -- and Medicaid in 2030 will still double from today's 4.2 percent of GDP to 8.4 percent. But if health spending rises at its historical (and faster) rate, then Medicare and Medicaid will nearly triple to 11.5 percent of GDP.

"It would be necessary to nearly double the Medicare payroll tax [now 2.9 percent of all wages and salaries] and increase all personal income tax collections by more than 70 percent to cover Medicare and Medicaid costs," says the study.

Now, let's add Social Security. It's projected to rise from today's 4.2 percent of GDP to 5.9 percent in 2030. In 2005 all federal spending -- the entire budget -- is 20 percent of GDP; Social Security, Medicare and Medicaid together equal 8.4 percent of GDP. By 2030 those three programs alone will cost somewhere between 14 percent of GDP (lower health spending) and 17 percent (higher health spending). Inescapably, we will get one or all of the following: exploding budget deficits; staggering tax increases; draconian cuts in other government programs; and abrupt reductions in services for the elderly.

So what does the Brookings study advise? Well, nothing. It presents various budget "options" -- larger government, smaller government and so forth -- and possible tax increases or spending cuts. It implores Americans "to make hard choices about what they want the federal government to do and how they want to pay for it."

Asked why Brookings experts couldn't craft a plan, co-editor Isabel Sawhill said: "That requires value judgments -- and we don't all agree among ourselves." You can't fault her honesty, but if people who think constantly about government -- and don't face elections or angry voters -- won't make the hard choices, why should politicians?

Our budget stalemate lies precisely in the "value judgments" that the Brookings study avoids. The present political consensus is crumbling. For decades higher benefits for the elderly were effectively paid for by reducing defense spending -- not by raising taxes or cutting other programs. In 1960, defense was 52 percent of the budget; in 2005, it's 19 percent. After Sept. 11, 2001, military spending won't shrink much more, but even if it disappeared, the savings wouldn't cover future spending on the elderly. The same, incidentally, is true of President Bush's tax cuts; even if they were eliminated, the resulting tax increases would only curb today's deficits -- not pay for tomorrow's spending.

We need a new public consensus to reflect new realities. Because all choices are hard, they require a larger moral and social framework that makes them legitimate. Big questions arise. With longer life expectancies, who's "old''? How much of a moral claim do the old -- who could save for retirement and work longer -- have on the young to pay for them? How do the needs of the old compare to society's other needs? How high can taxes go without slowing economic growth? By not presenting a plan, the Brookings experts evade the task of justifying it as moral or practical.

My views are oft-stated: Raise eligibility ages, trim Social Security benefits for wealthier retirees, make the elderly pay more of Medicare's costs. Americans should work longer to reflect longer life expectancies. Even so, taxes will have to rise. The alternative is a society that's unjust to the young, vulnerable to economic stagnation and too stingy with other national priorities.

Those with competing views should make their case. If the Brookings experts couldn't agree, two teams might have laid out contrasting visions. The political role of places such as Brookings is to clarify choices by voicing ideas that may be hard for politicians but, once broached, become more respectable. That's the way to a new consensus. Thinking small -- treating the budget problem as accounting exercise -- won't get us there.


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