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Confronting Long-Term Budget Problems

Now what?

That question now hovers over all of Congress’ deliberations on the nation’s fiscal situation.

As the co-chairs of the Bipartisan Policy Center’s Debt Reduction Task Force—Sen. Pete Domenici and Dr. Alice Rivlin—testified before the Senate Budget Committee today, all of the sound and fury that has engaged Congress as it tries to complete its work on the FY11 budget accomplishes almost nothing toward getting America’s national debt under control.

Domenici, former Chairman of the Senate Budget Committee, and Rivlin, who founded the Congressional Budget Office, headed OMB, and was Vice Chair of the Federal Reserve Board, testified that the present focus on savings in non-security, discretionary appropriated accounts detracts from the larger problem.

The BPC plan does freeze both domestic and defense discretionary spending for several years, but those accounts only total about one-third of the federal budget. And, those accounts rise only slightly year over year, while the festering problem—entitlements—consume a larger and larger portion of the budget.

As Domenici and Rivlin testified, if Congress cannot devise a long-range plan this year to get entitlement spending under control, the national debt will soon reach 100 per cent of our Gross Domestic Product and within 20 years will approach more than 200 per cent. Such levels, all commentators agree, are simply unsustainable.

“Debt denial” isn’t the problem, either here or overseas. Several years ago, the head of the French Assembly said, “we all know what has to be done, we just know that we won’t be re-elected if we do it.” That perceived reality baffles most developed nations, where indebtedness rises inexorably and the population ages very predictably.

It is that combination of an aging population that needs more and more health care, worsened by costs of medical procedures that increase annually by more than the rate of inflation and GDP growth, that endanger America’s fiscal future.

What we have is a variation on the famous dictum of Baron Rothschild, “compound interest is the eighth wonder of the world.” Compound interest is wonderful when it is on your side. It is gruesome when it is working against you. And, in American right now, demographics and health costs form a compound interest nightmare.

An example suffices. The Congressional Budget Office forecasts that health care procedures will rise by about 1.7 per cent more than the underlying growth of our GDP. At the same time, demographics in the form of the leading edge of the Baby Boomer generation will swell Medicare and Medicaid rolls. So the nation faces a compounding of about 5 per cent (health procedure prices) on top of a compounding of the population using that health care (the demographic bulge).

Without root reform of Medicare, Medicaid, other health care entitlements, and agricultural entitlements, coupled with demanding a 75-year solvency regime for Social Security, America will find buyers of its bonds, notes, and bills demanding higher and higher interest rates.

At some point, gradually or violently, America will begin paying more to pay the interest on its debt than it spends on almost any other single item in the budget—including defense and non-defense discretionary spending.

Committee hearing materials:

2011-03-15 00:00:00

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