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The Looming Crisis

Testifying today before congress, Alan Greenspan outlined the need for sharp, sharp cuts in entitlement spending:

In fiscal year 2004, federal outlays for Social Security, Medicare, and Medicaid totaled about 8 percent of GDP. The long-run projections from the Office of Management and Budget suggest that the share will rise to 9-1/2 percent by 2015 and will be in the neighborhood of 13 percent by 2030. So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable. The likelihood of escalating unified budget deficits is of especially great concern because they would drain an inexorably growing volume of real resources away from private capital formation over time and cast an ever-larger shadow over the growth of living standards.
In other words, if we do nothing, public spending will rise from its current level of 35.7 percent of GDP (this is including state and local governments) to something more like 40.7 percent of GDP. Consulting our friendly OECD data sheet on fiscal balances and public indebtedness (Excel File) we see that the current OECD average is 40.6 percent of GDP. Right now, the United States, Switzerland, New Zealand, Korea, Japan, Ireland, and Australia spend significantly less than 40.7 percent. Canada and the Slovak Republic are close. The UK, Sweden, Spain, Portugal, Poland, Norway, the Netherlands, Luxembourg, Italy, Iceland, Hungary, Greece, Germany, France, Finland, Denmark, the Czech Republic, Belgium, and Austria all spend more. Oftentimes, much more.

Obviously, raising the requisite tax revenue would be politically difficult. Especially in an era when one of the country's top economic policy officials can testify before congress in a manner that simply assumes that spending 40.7 percent of GDP on the public sector would be intolerable. International comparisons, however, indicate that it's perfectly tolerable. Especially when you consider that the aggregate GDP in 2030 will be a lot higher than the 2005 GDP, thus leaving us with both more public services and more after-tax income.

Now for the record, I think there are steps we should take to curb the growth in per person Medicare spending, because I think international comparisons (once again!) demonstrate pretty clearly that reform of the health care system would let us get more bang for our buck. But we really don't need to do even this.

March 2, 2005 | Permalink

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» Macleans on fragile US Economy from Murky View
Macleans is running an article about the current unsustainable fiscal policy in the US. I originally saw this on Bound By Gravity. He's asking for some comment from any economists or others with a different point of view. Please go visit if you'd ... [Read More]

Tracked on Mar 2, 2005 3:52:34 PM

» The benefits vs GDP % argument from bennellibrothers.com
Matthew Yglesias discusses entitlement spending, the comments made by Greenspan, and the looming crisis. I agree with him to a certain extent regarding I think there are steps we should take to curb the growth in per person Medicare spending,... [Read More]

Tracked on Mar 3, 2005 1:24:59 PM

» The benefits vs GDP % argument from bennellibrothers.com
Matthew Yglesias discusses entitlement spending, the comments made by Greenspan, and the looming crisis. I agree with him to a certain extent regarding I think there are steps we should take to curb the growth in per person Medicare spending,... [Read More]

Tracked on Mar 3, 2005 1:26:47 PM

Comments

International comparisons, however, indicate that it's perfectly tolerable.

Huh? Americans are not Swedes or Germans. It may be acceptable to them; not to us.

Posted by: Al | Mar 2, 2005 3:48:12 PM

Germany's unemployment level hit 12.6%. France's around 10%. For Americans, that is unacceptable.

Posted by: Nudnik | Mar 2, 2005 3:52:31 PM

Al: Many of us ARE Swedes or Germans, or both. Not all Swedes in Sweden or Germans in Germany like a high-tax, high-benefit public sector, but enough of them do to make it the policy of choice. There's nothing "German" or "Swedish" about it. A large number of Americans would prefer such a system, but they are currently outvoted. That could change. There's nothing "American" about that.

Posted by: C.J.Colucci | Mar 2, 2005 3:56:03 PM

Greenspan has lost all his credibility with his Social Security phase-out propaganda. Right now, he's a hack.

Posted by: Carlos | Mar 2, 2005 3:58:48 PM

There's a big difference between paying Swedish/German tax levels and receiving a generous Swedish/German welfare state, and paying Swedish/German tax levels in America and receiving a threadbare safety net starved by a massive military-industrial complex, corporate cronyism and debt repayments. Worst of both worlds.

Posted by: California | Mar 2, 2005 4:03:28 PM

I can think of no better advertisement for entitlement reform than showing how economices with public sector GDP over 40% do as compared to those with less than 40% of GDP.

There's a reason that Germany and France are trying to cut back on their public safety nets.

Posted by: Hoo | Mar 2, 2005 4:06:00 PM

While I don't see anything a priori wrong with comparing ourselves to German or Sweden, I'd hesitate before using as a signficant defense of Social Security.

Whether or not America is actually exceptional is beside the point; Americans are not fond of comparing our government to *any* others, except in condescension.

What I think would be more useful to compare our current fiscal position to our own past - pointing out that the flattening of progressive tax rates have made life more insecure for the middle class. Don't talk about Hooverville, talk about affording illness and an annual vacation.

The Republican leadership may try to call any discussion of economic difference "class warfare," but most Americans are poignantly aware of where they stand not just to Bill Gates, but their parents. Everyone's working harder, longer, for less.

Posted by: Ken | Mar 2, 2005 4:09:42 PM

What California said. About a half of all the federal spending is worse than waste - it's military spending of one form or another. Therefore we need to cut Social Security, Medicare and Medicaid. Obviously.

Posted by: abb1 | Mar 2, 2005 4:19:17 PM

Greenspan oraculates: "So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable."

Does anyone mainstream ever bring up the concept that the way to rationalize Medicare and Medicaid costs, and bring them down is to make the program universal? Does anyone mainstream ever mention that single payer health care makes entitlement budgeting problems solvable by bringing everyone into the system?

- That single payer is not just a liberal idea for helping the working poor and lower middle-class 15% of Americans without any health care.

- That single payer is also a way to reduce bankruptcies and broken financial lives for unlucky middle-class folks.

- That single payer is also a hardheaded way to protect all American taxpayers and the federal budget over the next half century?

- That single payer is also a business-friendly way to protect American industry competitiveness by rationalizing health care costs?

- That single payer is also a growth-friendly way to make American labor more mobile and efficient?

Posted by: Petey | Mar 2, 2005 4:21:10 PM

"the Slovak Republic"?

Posted by: David Weman | Mar 2, 2005 4:24:51 PM

"About a half of all the federal spending is worse than waste - it's military spending of one form or another."

If you consider "half" to be synonymous with 18%, then the above statement is true.

Posted by: Petey | Mar 2, 2005 4:24:55 PM

OT: McCarthyite Maoists?

Posted by: Michael Scott | Mar 2, 2005 4:34:11 PM

Great rhetoric Petey!

Posted by: wetzel | Mar 2, 2005 4:37:54 PM

the way to rationalize Medicare and Medicaid costs, and bring them down is to make the program universal

Yeah, it perfectly reasonable that if you give a whole lot of health care to a whole bunch of people who don't get it now, the overall costs will go down. Sure, I see that!

Really, Petey, I don't think you meant "rationalize", I think you meant "ration".

Posted by: Al | Mar 2, 2005 4:43:11 PM

Not all Swedes in Sweden or Germans in Germany like a high-tax, high-benefit public sector, but enough of them do to make it the policy of choice. There's nothing "German" or "Swedish" about it. A large number of Americans would prefer such a system, but they are currently outvoted. That could change.

Sure. And currently the United States is not an Islamic Republic because the majority of the people here don't want that. But that could change - look at Iran!

The point is that, historically, the majority of Americans have not wanted a government that is 40+% of GDP. And it is irrelevant that the majority of Swedes and Germans have.

Posted by: Al | Mar 2, 2005 4:46:49 PM

If you consider "half" to be synonymous with 18%, then the above statement is true.

Do you count interest payments on the debt accumulated because of the 1980s arms race? Veterans programs? Military foreign aid? NASA? Energy Department nuclear weapons programs?

Count everything and you'll get a half - at least a half, trust me.

Posted by: abb1 | Mar 2, 2005 4:48:58 PM

"Yeah, it perfectly reasonable that if you give a whole lot of health care to a whole bunch of people who don't get it now, the overall costs will go down. Sure, I see that!"

I don't expect you to see it, Al, because I don't think of you as very open-minded.

But it is actually true that we can insure 100% of the citizenry for less than we insure 85% of the citizenry. The paradoxical nature of this dissolves pretty quickly once you look into the details.

"Really, Petey, I don't think you meant "rationalize", I think you meant "ration"."

I think it's no coincidence that ration and rationalize come from the same word root.

We already have health care rationing, only it's not done in a very rational way. We have rationing by wealth, insurance coverage, and ability to qualify for patchwork government programs.

Now we have elderly citizens giving their wealth away to qualify for Medicaid. Now we have children with colds getting treated in emergency rooms for $2,000 billed to the taxpayers when they could be handled at a clinic for $40. This is not how an efficient delivery system works.

And since this is America, the well-off will always be able to supplement the basic single payer package to their heart's content, just as the wealthy will always be able to supplement their SS income at retirement.

But by bringing everyone into a basic health care system, you actually manage to make care delivery more efficient by a startling amount.

Posted by: Petey | Mar 2, 2005 4:51:48 PM

Petey, what country would serve as a model for the health care system you are proposing? Canada? Germany? There are plenty of reasons to not go down the universal health care road.

Posted by: Mike | Mar 2, 2005 4:56:34 PM

BTW, the US will not catch up with Sweden or Germany because health and pension costs are rising for those countries too and will prevent US and Germany converging.

Posted by: Otto | Mar 2, 2005 4:59:06 PM

"Count everything and you'll get a half - at least a half, trust me."

Download a budget, buddy. They're easy to read. This is a reality-based community, y'know...

Add in veteran's benefits to the entire military for this year, and it's still only around 20% of spending.

Military spending hasn't exceeded 30% of the budget since 1973. It used to run at half in the 1950's, but that's a while ago now. Perhaps your sources are five decades out of date...

Posted by: Petey | Mar 2, 2005 5:01:12 PM

"Petey, what country would serve as a model for the health care system you are proposing? Canada? Germany?"

I'm not an expert in the field, and I have no idea what the details should look like. But what I do know is that Medicare and Medicaid are a King Kong of a problem over the next 50 years that can only be solved by bringing everyone into the system.

"There are plenty of reasons to not go down the universal health care road."

It seems to me that there are more crucial reasons to go down that road than there are reasons not to.

Posted by: Petey | Mar 2, 2005 5:06:27 PM

BTW - the Excel file in fascinating. One wonders how New Zealand reduced its government's outlays from 52% of GDP in 1991 to 42% in 1995. Wow - 10% in 4 years! Are there any Kiwis out there who know? Did they slash the budget? Or was there huge GDP growth without concomitant budget growth?

Posted by: Al | Mar 2, 2005 5:09:48 PM

"likelihood of escalating unified budget deficits is of especially great concern "

Gosh, it would have been nice if he'd said something like this a couple years ago, instead of cheerleading for Bush's massive tax cuts...

Posted by: Mahan Atma | Mar 2, 2005 5:11:11 PM

Well, Petey, I want to add interest payments on the debt too - that's still paying for 1980s military build-up. That's almost another 20% (depending on the interest rates) isn't it? And, like I said, a number of other military-related programs funded outside of the Pentagon.

Posted by: abb1 | Mar 2, 2005 5:12:37 PM

"Petey, what country would serve as a model for the health care system you are proposing? Canada? Germany? There are plenty of reasons to not go down the universal health care road."

Given that they produce better outcomes for significantly less *state* money--let alone less money overall--why not? Private insurance combined with ad hoc emergency measures is an extremely ineffecient way of providing health care. Why do you think *nobody* emulates the American system? "How about we spend far more money, insure fewer people, and get worse health." Gee, you think that would be a winning platform in Canada, but I guess not...

Posted by: Scott Lemieux | Mar 2, 2005 5:24:44 PM

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