The Bowles-Simpson Band-Aid

I have twice blogged about the Bowles-Simpson deficit-reduction plan (here and here). As I said in the first of the two posts, Bowles-Simpson

aims at too many spending targets, and misses the elephant in the room: “entitlement” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

How badly does Bowles-Simpson miss the real target, namely, so-called entitlements? Here’s a closer look:

Bowles-Simpson ducks the long-term problem and focuses on the deficit through 2020. From now until then, the annual rate of spending on entitlement programs is expected to rise by $1.3  trillion (that’s projected spending in 2020 less spending in 2010). At
the same time, the annual rate of so-called discretionary spending  (which includes defense) is expected to rise by less than $0.2
trillion. The other big kicker is interest, which is expected to rise by $0.7 trillion.

So, Bowles-Simpson would reduce the projected increases in Social Security and government health-care programs by a “whopping” $0.1 trillion, while  whacking about the same amount out of discretionary spending, jacking  up tax revenues by $0.2 trillion, and saving about $0.2 trillion in  interest expenses. Net result: the projected deficit for 2020 shrinks  by about $0.8 trillion. (I derived the estimates from Figures 15 and 16 of the  appendix to the Bowles-Simpson report.)

What the Bowles-Simpson report doesn’t say is that the bill for entitlement spending will keep growing after 2020. You can tell that by looking at the trends in the “mandatory” spending lines of Figure 15 (the “plausible baseline”). And you can see the trend starkly in figure A-1 of  of CBO’s long-term budget outlook, as of August 2010. Social Security’s share of GDP rises until the 2030s, then levels off. But the expected share of GDP consumed by federal heath-care programs just keeps rising.

The Bowles-Simpson band-aid would merely mask the essential problem for another 10 years, at which point it will be that much harder to trim the “commitments” represented by entitlement programs, and that much harder to find places to cut “discretionary” spending. (Defense, as usual, will be a tempting target.)

The bottom line: If long-term entitlement “commitments” aren’t reduced soon, the tax increases required to bring the deficit under control will be huge and economically crippling. Entitlements will suck up money that could go into growth-producing investments, and the economy will be locked in a death-spiral toward permanent stagnation.

About these ads