The Anti-Economist — From the November 2012 issue

The Entitlement Crisis That Isn’t

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At September’s Democratic National Convention, Bill Clinton roused his party when he said that Republicans, having left Barack Obama with a “total mess,” were now complaining that the president hasn’t “cleaned it up fast enough.” Clinton barely mentioned what got us into that mess: George W. Bush’s sharp tax cuts, mostly for the wealthy, which led more to financial speculation than to solid growth. He didn’t mention that job creation was slower in the years following the Bush tax cuts than at any other time in the postwar era. Nor did he mention that a substantial increase in taxes would go a long way toward calming the financial waters, since the very idea of tax hikes remains anathema. Though many Democrats like to bask in nostalgia for the 1990s, they rarely mention that Clinton was the last president to get a major tax increase passed by Congress. It’s no coincidence, of course, that one of the country’s greatest periods of peacetime prosperity followed.

Contrary to warnings by politicians of both parties and by almost all of the mainstream press, America’s biggest fiscal problem is not spending on Social Security, Medicare, and Medicaid; it is our almost complete unwillingness to tax ourselves sufficiently to maintain a modern state. Today’s deficit—now at about $1.1 trillion—was caused not by social spending but by the Bush tax cuts of 2001 and 2003, the Iraq war, and the recent recession. So where did the consensus that entitlements are the principal cause of all the nation’s financial problems—and that cutting them is the only path to fiscal health—come from?

It should not surprise that such right-wing groups as the Heritage Foundation insist that entitlement spending will eventually soak up all federal revenue.

By their own account this won’t happen until at least 2045, even if we accept the assumption that there will be no rise in federal tax revenues and that reforms such as Obamacare will have no serious impact on future health-care costs.

But they aren’t the only ones leading this disinformation effort. The Third Way, a centrist Democratic organization, notes that spending on entitlements has been growing while public investment in infrastructure, education, and so forth has been falling. “Entitlements are squeezing out public investments,” they conclude. But there is no causal relationship to be found here. Bill Clinton was stingy about raising public investment in the 1990s even when he had a big surplus to work with. Meanwhile, military spending has somehow not been squeezed by entitlements. Even granting such an investment squeeze, The Third Way never raises the possibility that more federal revenue might relieve it.

The preference for small government and spending cuts is not based on serious economic research. Although ideologically biased economists generate studies “proving” that higher taxes and bigger government reduce growth, the best, most objective analysis of tax rates, by Joel B. Slemrod of the University of Michigan and Jon Bakija of Williams College, finds no relationship between high taxes and reduced rates of economic growth.

The same is true of government size and growth. The most important book on the economic impact of big government around the world is Growing Public, by Peter H. Lindert, a respected mainstream economist at the University of California at Davis. A large government, he finds, simply poses no systemic impediment to growth. Big governments don’t spend money stupidly. Much of their social-welfare expenditure, including on low-cost education, parental leave, and child-care regulations, is good for growth.

Faced with these facts, pundits and politicians alike fall back on a template established a few years ago by Joshua Bolten, George W. Bush’s budget director. “In the longer run,” he wrote in 2006, “no plausible amount of tax increases could possibly close the enormous gap that will be created by the unsustainable growth in entitlement programs.” Members of the centrist commentariat take Bolten’s claim as gospel. In a July New York Times column, for example, the paper’s former executive editor Bill Keller, whose reputation as a reporter had always been excellent, wrote, “The traditional liberal alternatives—raise taxes on the well-to-do, cut military spending—are not nearly enough by themselves. The arithmetic simply doesn’t work, unless we face the fact that entitlements are a bargain we can’t afford to keep, not in full.”

But as Bruce Bartlett, a high-level adviser to Ronald Reagan and George H. W. Bush—and no fuzzy-headed liberal—succinctly puts it, Bolten’s statement is “factually wrong.” Despite Keller’s insistence, the arithmetic does work. “Almost every country in Europe has a tax/GDP ratio high enough to cover all of the projected increase in spending in the United States through higher revenues alone,” writes Bartlett. Roughly speaking, the average nation among the thirty-four members of the Organization for Economic Cooperation and Development (OECD) collected some 38 percent of its citizens’ income in taxes. U.S. citizens are taxed—including all federal, state, and local income taxes, sales taxes, and payroll taxes (the taxes that are taken out of every employee’s paycheck for Social Security and Medicare)—at only about 26 percent of their income. Yet the high-tax economies grow about as fast as ours does, sometimes faster. Prosperous Denmark, Norway, and Sweden have tax rates well above 40 percent.

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