“There are two ways to conquer and enslave a nation. One is by the sword and the other is by debt.”
– John Adams
Paul Ryan, for all his flaws as an immigration dove and record of taking tough votes such as the grotesquely cronyist TARP bailout, was nonetheless almost single-handedly responsible for making entitlement reform a part of Republican Party economic orthodoxy. Ryan’s “Roadmap for America’s Future,” first introduced in 2008 and later more fully flushed out, detailed the Wisconsin congressman’s policy vision for a future that included structural reforms — including means-testing, introduction of competitive market forces, and optionality for privatization measures — to America’s bankrupting entitlement programs of Medicare, Medicaid, and Social Security. In the era of Barack Obama’s trillion-dollar deficits and quasi-nationalization of the health insurance industry, Ryan’s arguments quickly moved from the wonky fringe to the mainstream of GOP policy advocacy. The culmination of Ryan’s popularity within the party was his being tapped as Mitt Romney’s running mate in the 2012 presidential election.
The nomination and subsequent election of Donald Trump severely shifted the mood, within the GOP, as to the desire for and urgency of entitlement reform measures. Trump, famously, campaigned on populist pleas to “protect” Medicare and Social Security against those who would seek to structurally reform the programs so as to make them fiscally sustainable. Seen through this prism, Trump’s shifting the GOP away from entitlement reform may be viewed as part of the broader tension within conservative ranks between traditional libertarian/neoliberal laissez-faire and ascendant Tucker Carlson economic populism.
The GOP can, and should, air out policy debates that may sometimes offend the delicate sensibilities of The Wall Street Journal editorial board and other bastions of 1980s-style Reaganism. A debate over low-skilled legal immigration — or legal immigration levels, more generally — cannot be an untouchable third rail. And more generally, it is entirely appropriate for Republicans to debate among themselves whether it makes more sense for a macroeconomy to more highly value gross domestic product and economic growth or to more highly value, à la Oren Cass, the inherent dignity of labor.
It is quite likely that Trump’s reflexive opposition to entitlement reform measures amounts to a symptom — and not a cause — of the pulse of the Republican voting base. Giving away Free Stuff™️ has always had strong bipartisan appeal. Sober, hard-headed straight talk about the absolute necessity to cut bankrupting spending programs? Not so much.
But Republicans need to rise to the occasion. There are two simple reasons. First, the impending debt crisis is very, very real absent structural entitlement reform. Second, the Republican Party — warts and all — remains the only political vessel that stands any (modicum) chance of advocating an intellectually serious approach to national fiscal solvency.
A Wall Street Journal op-ed last week by Harvard professor and longtime conservative economist Martin Feldstein succinctly lays out the problem:
According to the Congressional Budget Office, the deficit this year will be $900 billion, more than 4% of gross domestic product. It will surpass $1 trillion in 2022. The federal debt is now 78% of GDP. By 2028, it is projected to be nearly 100% of GDP and still rising. All this will have very serious economic consequences, and the CBO understates the problem. It has to base its projections on current law—in this case, the levels of spending and the future tax rules and rates that appear in law today.
Those levels don’t match realistic predictions. Current law projects that defense spending will decline as a share of GDP, from a very low 3.1% now to about 2.5% over the next 10 years. None of the military and civilian defense experts with whom I’ve spoken believe that will happen, given America’s global responsibilities and the need to modernize U.S. military equipment. It is likelier that defense spending will stay around 3% of GDP or even increase in the coming decade. And if the outlook for defense spending is increased, the Democratic House majority will insist that the nondefense discretionary spending should rise to match its trajectory. …
What does that mean for the long-run ratio of the federal debt to GDP? Federal debt will probably surpass 100% much sooner than 2028. If discretionary spending increases, debt growth will jump to 100% even quicker. When America’s creditors at home and abroad realize this, they will push up the interest rate the U.S. government pays on its debt. That will mean still more growth in debt. …
To avoid economic distress, the government either has to impose higher taxes or reduce future spending. Since raising taxes weakens incentives and further slows economic growth—worsening the debt-to-GDP ratio—the better approach is to slow government spending growth. …
Thus the only option is to throw the brakes on entitlements. In particular, the government needs to hold back the growth of Medicare, Medicaid and Social Security. Federal spending on the two major health programs is projected to rise from its current 5.5% of GDP to more than 7.2% by 2029. And it will only keep increasing after that.
Or consider the prolific Brian Riedl, writing last April at Manhattan Institute’s “Economics 21” blog. Riedl lays out the staggering numbers pertaining to our bankrupting entitlement programs’ impending fiscal shortfalls.
CBO’s Long-Term Budget Outlook shows that between 2017 and 2047, Social Security and Medicare will run a cash deficit of $82 trillion. Specifically, Medicare will run a $40 trillion cash deficit, Social Security will run a $19 trillion cash deficit, and the interest costs of those deficits will add $23 trillion more. The rest of the budget had been projected to run a $4 trillion surplus over this period, although making the latest tax cuts permanent would likely change this to a roughly $5 trillion deficit.
As a percentage of GDP, CBO projects that Social Security and Medicare will continue to collect approximately 6 percent of GDP in dedicated revenues yet see spending rise from 8.1 percent today to 12.5 percent of GDP by 2047 – or 16.4 percent when including the interest cost of these deficits. The rest of the budget will remain approximately balanced at around 12 percent of GDP (or run a 1 percent deficit if the tax cuts are extended).
Generally, federal program spending outside Social Security, Medicare, and Medicaid is projected to continue declining as a share of the economy. Tax revenues – even with the tax cuts made permanent – are expected to soar past the 17.4 percent of GDP average of the past few decades and then continue rising due to inflationary increases in taxes and taxed retirement distributions.
In other words, CBO projects above-average tax revenues and falling spending for other programs. But the rise in Social Security, Medicare, and resulting interest costs from 8.1 percent to 16.4 percent of GDP between 2017 and 2047 determines nearly the entire rise in budget deficits.
Perhaps, as investor Todd Stein argues at Fox Business, the current situation with our debt is already so hopeless that policymakers ought to consider a “soft default” — what Stein describes as a “one-time devaluation of the dollar which enables the government to pay back its debts in full, albeit at a lower intrinsic value.” Suffice it to say this is not a particularly pleasant thought experiment. Credit markets in economically lesser countries, such as Argentina, have often historically rebounded from sundry sovereign defaults. But how that situation would unfold in the context of the United States, the wealthiest nation in the world whose dollar serves as the world’s reserve currency, is at best an unsure proposition.
Perhaps a “soft default” will one day become necessary. Indeed, perhaps that day is sooner rather than later.
But we are not quite there yet.
The better solution, in the immediate term, is for the Republican Party to make an actual public commitment to structural reform of our bankrupting entitlement programs. The GOP is the only major political party in America right now that has any chance of staving off a Greece/Italy-style debt crisis, wherein debt and interest rates begin to simultaneously rise in unsustainable seesaw fashion. It is only the GOP that has any fidelity — no matter how vestigial it may seem, at times — to free-market economics and the notion that private investment, which necessarily depends on not being crowded out by debt-inducing government largesse, is the best economic engine for mass societal prosperity.
It is only the Republican Party that is capable of discussing our bankrupting entitlement program crisis like mature adults. Republicans should rise to the occasion. The future solvency of the republic depends on it.