The Washington Post
Feb. 15, 2013
The reason to worry about the deficit today is not that higher interest rates will crowd out private borrowing or lead to a market panic, as there’s no evidence either consequence is in the offing anytime soon. Rather, the reason to worry about the deficit today — and, more to the point, the trends in government spending and taxation that drive it — is that the most worthwhile kinds of government spending are getting squeezed out.
The key insight behind this theory is that some forms of government spending rise automatically and rapidly, and are very politically difficult to cut, while other forms of government spending need congressional approval every single year and have few constituencies to protect them. In the first category are Medicare and Medicaid and Social Security, all of which are projected to consume much more of the federal budget in the coming years. In the second category are things like education funding, research and development, stimulus, infrastructure investment, and even the military. And the fear is the first category is squeezing out the second category.
As David Leonhardt notes in ‘Here’s the Deal,” the federal government has been tracking spending on “Major Physical Capital, Research and Development, and Education and Training” since 1962. Over that period, it’s fallen from around 2.6 percent of GDP from the mid-60s to the mid-80s to 1.8 percent from the ’80s until the financial crisis. The stimulus pushed it above 2 percent again, but that’s a temporary lift. Between the cuts from the 2011 Budget Control Act and the possible cuts from the sequester, this spending — which is essentially the investments we make in our future — is likely to be driven to historic lows. Meanwhile, an Urban Institute study finds that “looking solely at the federal budget, an elderly person receives close to seven federal dollars for every dollar received by a child.”
“Growth of entitlements is crowding out programs for younger families and their kids and are likely to impair social mobility,” says Isabelle Sawhill, co-director of the Center on Children and Families and the Budgeting for National Priorities Project at Brookings.
Read the full article here
Economic Policy Project