Federal spending has been stable at around 20% of GDP for over 50 years, since it settled down into a long-term trend after World War II. But long-term Congressional Budget Office projections now show federal spending exploding to around 38% of GDP by 2050, or even higher. The driving cause behind this is entitlement programs, Social Security, Medicare and Medicaid.
If anything even close to this happens, small government conservatives will have been disastrously routed.
Adding in state and local spending, total government spending would then be close to 50% of GDP. The robust capitalism that has historically provided the world-leading prosperity Americans are used to will have been replaced by Swedish socialism. We would have held the Socialists at bay for the last 50 years, only to see them march right over us just when we thought we were achieving permanent victory.
The old-line Washington establishment has made clear how they want to address this fiscal cataclysm. They are calling for a grand compromise deal between Republicans and Democrats, conservatives and liberals.
That deal would be a mega tax increase in return for cuts in entitlement spending.
This is what is behind legislation recently introduced by Rep. Frank Wolf (R.-Va.) to create an entitlements commission. The bill picks up on President Bush’s proposal in this year’s State of the Union address for a bipartisan commission to study ways to address the long-term problems of Social Security, Medicaid, and Medicare.
The bill explicitly provides that the commission is to consider tax increases as well as other reforms. But to limit criticism from conservatives, the bill says only increased revenue from tax code changes that increase economic growth could be considered.
That double talk will never work, however. Either tax increases are on the table or they are not. Indeed, in a Washington Post column on May 20, David Broder reported that the Wolf bill would allow for consideration of tax increases, and that Wolf hoped Clinton Treasury Secretary Robert Rubin might agree to serve on the Commission. President Bush has personally appealed to Rubin to help lead such a commission. But Rubin has refused to do so unless tax increases are on the table, a position echoed by other Democrats.
Rubin and the other Democrats are not going to accept a provision saying only increased revenue from tax changes producing higher projected economic growth could be considered. So expect any restriction on tax increases to be dropped if the Wolf bill is to go forward.
Indeed, late last month President Bush’s National Economic Council Chairman Al Hubbard told the National Journal that President Bush would accept an entitlements commission where tax increases are on the table.
And on June 13, a Washington Post editorial described the Wolf bill this way: “The congressman, who supported all of Mr. Bush’s tax cuts, deserves credit for being explicitly willing to put tax increases on the table. New revenue is a necessary part of any solution, a reality Mr. Bush and his fellow tax-cutters have been unwilling to acknowledge. As Mr. Wolf said in announcing his plan last week, ‘Given the enormity of the challenge, the commission needs to be able to look at every component of our fiscal policy to fairly assess where we stand and how we can best move toward a sound fiscal future.’”
In other words, conservatives, don’t be fooled. This is all about an historic, mega tax increase to finance an explosion in entitlement spending.
Moreover, Wolf’s commission is to operate like the Federal Base Closing Commission. When the entitlements commission makes its proposals, including tax increases, the House and Senate are each required to take an up or down vote on the proposals, without amendments from the floor, which might otherwise pick apart the deal the Commission has struck. Just as the Base Closing Commission enables controversial base closings to be rammed through Congress, this provision in the Wolf bill could enable enormous tax increases to be rammed through as well.
Wolf cited support from the Concord Coalition, an organization fervently supporting tax increases, and the Heritage Foundation in developing the bill. Heritage, in fact, has been meeting with such liberal groups as the Urban Institute and the Brookings Institution to develop a consensus package of entitlement reforms. On May 24, Cato Institute economist Jagadeesh Gokhale joined this chorus in calling for a compromise package including tax increases in a column on the Tech Central Station website. Former Hill staffer Bruce Bartlett in his latest book touts substantially increasing revenues with a new value-added tax.
This strategy of a grand compromise with the liberals will inevitably lead to a reversal of the Bush tax cuts. But the fundamental folly is more basic than that. If federal spending as a percent of GDP is currently slated to rise from 20% to around 38%, where is a grand compromise with the liberals going to leave it? Surely not at 20%, and probably not even 25%. How much in benefits can we expect to cut to bring the current projection down, even without trying to cut a deal with liberals? The truth is that the backdoor consensus is to settle in with a compromise leaving federal spending around a disastrous 30% of GDP.
Fortunately, there is a better way to deal with this crisis, which conservatives have been working on for a long time. A large personal account option for Social Security, such as the one proposed by Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.), would dramatically reduce federal spending over the long run by eventually shifting the payment of Social Security retirement benefits off the federal budget altogether, and into the private sector. Indeed, this alone would reduce federal spending by a dramatic, historic, five percentage points of GDP. Later these accounts could be expanded to cover survivors and disability benefits, reducing federal spending by another 1.5% of GDP.
Secondly, the hugely successful reform of the old Aid to Families with Dependent Children (AFDC) program should be expanded to the other welfare programs, especially Medicaid. The federal government would block-grant its share of spending on these programs back to the states, with the states then each running their own welfare systems based on work for the able bodied. The AFDC rolls were reduced by over 50% nationwide through these reforms, and even more where the work requirement was most strongly enforced.
Extending such reforms would enable federal spending on these programs to be held to less than the growth of GDP. That means that federal spending would again be reduced by more than necessary to stop Medicaid, and the other welfare programs, from increasing spending relative to GDP.
Medicare is the most difficult program to reform, but it, too, can be addressed through personal accounts, health insurance vouchers for low-income seniors, and Health Savings Accounts. Another component of reform would be to adopt a Taxpayer Bill of Rights spending limit for federal domestic discretionary spending, holding it to grow at no more than the rate of inflation plus population growth. Pro-growth tax reform would also help by increasing GDP faster than spending growth, effectively reducing spending relative to GDP.
This package of reforms overall can be expected to eventually reduce federal spending to less than 15% of GDP. Moreover, this far more ideologically sound approach is the far more viable one politically as well.
The grand compromise package of tax increases and benefit cuts is a pain caucus political kamikaze mission doomed to failure. It is the 1990 budget deal writ large. That year the first President Bush broke his read-my-lips-no-new-taxes pledge and told voters to read his hips instead. Two years later voters booted those hips out of office.
In contrast, the alternative approach is based entirely on positive populist reforms that would leave working people and their families much better off. The personal accounts for Social Security would provide workers with a much better deal than the current system, with, indeed, substantially higher benefits than the current system even promises, let alone what it can pay. The welfare reforms are better for the poor as well, because the reforms get them off welfare dependency and into work.
Candidates can run and win on this package of positive, populist reforms, including presidential candidates. They can’t do that with the pain caucus, tax increase, benefit- cut package. With this positive, populist package, we don’t need a compromise with the liberals for a tax increase, and other compromises that would just undermine the reforms, like dropping real personal accounts. The strong, populist appeal of the positive reforms will eventually force enough Democrats to go along to pass the measures. This is how the Republicans passed the Kemp Roth tax cuts and the Reagan budget cuts in 1981, and welfare reform in 1996.
The challenge we face with the current, projected, explosion in federal spending is analogous to the challenge we faced from the Soviets in the 1970s. Under President Ford, Secretary of State Henry Kissinger became convinced that we could never beat the Soviets and must, instead, negotiate the best accommodation with them we could. But first candidate and then President Reagan rejected that and argued that there was no substitute for victory. We all know how that turned out.
Today some are arguing we can’t beat the left on federal spending and must just negotiate the best accommodation we can, giving in to a massive increase in such spending relative to GDP. I am confident that a new Reagan will come along again successfully arguing that there is no substitute for victory.