March Madness has arrived early. The much debated and huffed-about sequester begins today barring some unforeseen action by Congress and the President. Suffice to say, this has been one of the most overwrought political situations we’ve observed in quite a while. We find the sequester and the debate surrounding the sequester fascinating, not because of the nitty-gritty embedded policy details or the fireworks between all the politicians and pundits, but because it presents another example of many policymakers and political activists missing the forest for the trees. So much time and energy is spent in the US bemoaning discretionary government spending as a whole. Interests on both the right and left have their pet projects and initiatives. Each side fights tooth and nail for its own interests and demonizes the other side’s wants, whether defense spending, welfare moms, research, general government services, or a number of other programs. The cacophony is overwhelming. All the while, the true hundred pound gorillas in the room—entitlements—are forgotten, perhaps conveniently considering Medicare, Medicaid, and Social Security are “third-rail” political issues. The simple fact of the matter is that both defense and non-defense discretionary spending are not big problems from a long-term budgetary standpoint. It’s the entitlement programs that are problematic, especially health care entitlements. Let’s take a look at some numbers.
First, here is a backward-looking chart showing federal spending as a percentage of GDP in four major categories, Defense, Nondefense Discretionary, Social Security, and Medicare.
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| Source: American Prospect and Congressional Budget Office |
As seen above, defense spending as a percentage of GDP has declined materially over time. Granted, the Vietnam War affected the numbers at the outset of the timeframe. Still, the War on Terror has been a significant event spending wise, yet defense spending as a percentage of GDP is only back to the late-1980s/early-1990s levels. Nondefense discretionary, which basically includes all government spending ex-defense that doesn’t fall into the entitlement buckets, has risen since 2000, with a notable bump during the Great Recession years as both the Bush and Obama administrations responded to the economic crisis. This figure has been in decline over the past few years, however, and has remained comfortably within the long-term range. After leveling off, Social Security expenditures have begun creeping higher again as a percentage of GDP. Medicare expenditures as a % of GDP have consistently crept higher. Of course, as the Baby Boomers retire in increasing numbers, the entitlement numbers will begin to grow quickly as we’ll observe later. Looking at these numbers, nothing in the defense or non-defense discretionary realm looks particularly egregious relative to historical precedent.
So, what does the future look like on the discretionary side? Judging by the rhetoric, we’re absolutely doomed because of all that out of control discretionary government spending. Actually, not so much. Here are a couple of charts that show the projected trajectory of defense and non-defense discretionary spending after the passage of the Budget Control Act. As you can see, even before the sequester cuts kick in, both defense and nondefense discretionary spending were slated to decline over the next 10 years as a percentage of GDP to levels below the lowest levels observed since World War II. To repeat, discretionary and nondiscretionary government spending were already set to decline below the lowest levels witnessed in the past 50 or 60 years relative to GDP. Both are already below the trailing 30-year averages.
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| Source: Bipartisan Policy Center and Congressional Budget Office |
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| Source: Bipartisan Policy Center and Congressional Budget Office |
So what’s the bugaboo that that keeps budget analysts up at night if discretionary spending is under control? Mandatory entitlement spending. First, a side note. Obviously, projecting figures out to 2040 or 2050 is always a dangerous exercise, especially considering we have a hard enough time making predictions a quarter or two ahead of time when it comes to economic growth, policy, and other factors. One thing we can see coming with relative accuracy is demographic waves. We know with a decent degree of accuracy how many folks will retire over the next 30 or 40 years and what they’re owed pension-wise. Life expectancy projections will probably turn out reasonably accurate as well. On the other hand, the growth trajectory of health care spending is a major wild-card. The health-care related entitlement programs are expected to account for the bulk of budgetary problems moving forward. Most projections show health care costs increasing at a similar pace over the coming decades as observed over recent decades. Of course, health care costs have outpaced CPI handily for years. Many people attack long-term entitlement spending projections on these grounds, perhaps rightfully, arguing that natural market forces will dampen health-care inflation and that the numbers will ultimately come in better than expected. So OK, let’s assume there’s a not-insignificant chance that health care inflation declines; isn’t it still prudent to consider the worst or “worser” case scenarios? If health care inflation moderates a good bit, that’s gravy. If not, we’re adequately prepared. As it stands now, using the lesser-case projections, entitlement spending is projected to explode over the next few decades:
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| Source: Heritage Foundation and Congressional Budget Office |
As seen above, under the less optimistic cost scenarios, and under assumptions that current entitlement policy remains intact, entitlement spending alone will eat 100% of Federal revenues within approximately 30 years. Assuming that we can bring health care cost inflation under some semblance of control, US demographics and other factors still suggest that entitlement spending will eat a significant amount of governmental financial resources over coming decades. The US government will increasingly become a “retirement program with a…large army,” as described by writer Paul Waldman.
What’s the bottom line? Though it remains the focal point for a lot of activists and loudmouths on the left and right, government discretionary spending, both defense and non-defense, is a minor irritant at worst and a non-factor at best. Are there inefficiencies throughout government? Most certainly. But, Congress and the President could decide today to cut every single dollar of nondefense discretionary spending today from the budget, for instance, and would eliminate less than half of the budget deficit projected for this year. As we’ve seen, under current policy, discretionary spending is moving towards low levels not seen for a few generations. The sequester debate no matter the side you’re on is small potatoes compared to the larger debates we need to have moving forward about entitlement spending. Current Washington games are an annoying sideshow and distraction. Dealing with entitlements will require incredibly tough discussions between younger and older generations about benefit levels to retirees, payments to providers, eligibility ages, means testing, public health, and a number of other issues. Somehow, Americans across generations are going to have to shed the tendency to exhibit “not in my backyard syndrome.” Unless these issues are addressed sooner rather than later, and unless they’re addressed honestly without band-aid, can-kicking solutions, there won’t be any room for guns or butter in the budget, only dentures and dialysis machines.
