2020: A Budget Odyssey angry а onstrators, almost all under the age of 30, gathered in front of the White House to protest the proposed hike in the Social Security tax. At one point the protesters began chanting: "Hey, hey, we won't pay," as they burned their Social Security cards. When several hundred senior citizens arrived for counter-demonstration organized by the American Association of Retired Persons, the Capitol police had to be called in to maintain order. "Welcome to the age of generational warfare," said one young woman from Cleveland who helped organize the march on the White House. Is this news story from the year 2020 an improbable doomsday scenario? Is our government really headed for such a tragic financial train wreck? Are the young and the old going to be pitted against each other in a political battle royal? Unfortunately, the answer is that something very much like this could happen early in the next century, if Congress continues to spend and tax and borrow and regulate and mandate over the next thirty years at the same pace that it has over the past forty. That is, if we simply stay on the course we are on, then this doomsday scenario could become a likely scenario. So before we discuss how to avoid this gloomy outlook in the next century, let's first investigate the full implications of the "stay the course" fiscal option. This should underscore why it is essential that, as a nation, we DO change course. The Past as Prologue Just how much more government can we expect in coming decades? One useful guide for answering this question is to examine the trends in government spending in recent decades. Federal spending consumed just 16 percent of GDP in 1950, but 24 percent in 1994. In real dollars this was a six-fold increase in the federal budget since 1950; a doubling since 1970; and a 50 percent rise since 1980. 2020: A Budget Odyssey Let's briefly review where all this money has been spent. Table 1-1 shows the patterns of budget growth since 1950. It reveals several important trends: An era of near-universal budget expansion-Over the past four decades almost every major component of the federal budget has increased in real dollars. The two exceptions to the rule are foreign assistance programs and veterans programs. (Veterans benefits were high in the immediate aftermath of World War II but have since declined slightly.) Table 1-1 Growth in Real Federal Expenditures, 1950-1994 (Billions of $1990) 2020: A Budget Odyssey Runaway entitlement spending Entitlements are the driving force behind budgetary expansion. Federal entitlement spending in real dollars has doubled roughly every eight years since 1950. Outlays for Social Security, health care, and welfare programs are five to ten times larger today in inflation-adjusted dollars than in 1950. To borrow an appropriate analogy from former Office of Management and Budget Director Richard Darman, entitlements are like relentless Pac-Men gobbling up the nation's economic resources. Defense budget growing since 1950 but shrinking as a share of GDP — Defense spending has been growing, though irregularly, since the 1950s. However, as discussed earlier, at less than five percent of GDP, defense spending in 1993 is well below its average in the 1950s and 1960s. Defense spending consumes only about half the share of GDP today than it did in the 1950s and 1960s. Furthermore, defense has been shrinking as a percentage of the federal budget consistently since the 1960s from about 40 percent of the budget to about 20 percent. Outlays for federal lending and interest on debt expanding - Federal credit programs and interest on the national debt are two other fast-growing areas of the budget. As the federal budget deficit continues to grow (it is now $250 billion) interest payments also climb rapidly. Meanwhile, the savings and loan cleanup added an estimated $300 billion to federal outlays. Although this particular crisis is over, at least temporarily, there is now concern that the Federal Deposit Insurance Corporation, the Federal Housing Administration, and the Pension Benefit Guaranty Corporation will soon require multi-billion dollar taxpayer bailouts of their own. Domestic discretionary spending slowed in 1980s - Most domestic discretionary programs - including agriculture, transportation, natural resources, social services, general government, and science expanded sharply from 1950 to 1980. In the 1980s the Reagan Administration had marginal success in trimming these programs. Their budgets in real dollars (but not in nominal dollars) declined in some cases. Nonetheless, without exception these domestic discretionary programs are considerably larger today than in 1950 and, as discussed in an earlier chapter, they are growing rapidly again so far in the 1990s. 2020: A Budget Odyssey The picture that emerges from this brief review of postWorld War II federal fiscal policy is this: Although virtually every area of the budget has expanded sharply since 1950, entitlements are the primary villain in the loss of federal fiscal discipline. A Glimpse into Our Fiscal Future To project the level and composition of spending over the next three decades, we make four assumptions about the U.S. economy and fiscal priorities: ASSUMPTION #1. Real GDP will grow at a two percent real annual rate over the next thirty years, which is consistent with the predictions of the Social Security Administration. ASSUMPTION #2. Defense spending will average 4.5 percent of GDP-well below its post-World War II average-and remain constant at that level. ASSUMPTION #3. Social Security and health care expenditures will rise at the rate forecasted by the Social Security Administration (assumption 2-B of the 1991 trustees report) and the Health Care Financing Administration. This assumes no new or expanded benefits over the next twenty years. ASSUMPTION #4. Discretionary programs in the budget will grow at their real annual rate of growth from 1950 to 1990. That is, we extrapolate their budget totals over the next 30 years based on their growth over the past 40 years. The results that emerge from these reasonable assumptions paints a bleak picture of America's fiscal future. Table 1-2 shows the breakdown of spending for major components of the budget. In the absence of dramatic reform, government expansion relative to the private economy will accelerate at an alarming and economically unsustainable rate: ♦ The federal government alone will consume 27 percent of GDP by the year 2000, 32 percent of GDP by the year 2010, and 41 percent by the year 2020. See Figure 1-1. Even if state and local spending simply remains constant as a share of the economy, by 2020 more than half of all economic output will be directly controlled by the government. ♦ In 1990 dollars, the federal budget by the year 2000 will reach $1.8 trillion, by the year 2010 it will exceed $2.5 trillion, and by 2020 the budget will approach $4 trillion. |