Slaughter & Rees Report - Sequestration and the Dinner Table
March 11, 2013 -- It has been 10 days since the onset of America’s fiscal “sequester”—that is, a cut of $85 billion in federal spending for the seven remaining months of fiscal 2013. Media coverage of the sequester has focused on assigning political blame or on prognosticating what next fiscal clash awaits Washington. The deeper issue at hand is what the sequester says about America’s fiscal values. Do they favor the country’s young and the future, or its old and the past?
For many years running, America’s fiscal values have steadily tilted toward the old. This can be seen in the expansion of Medicare, Medicaid, and Social Security, entitlement programs that accrue mainly to the old. It can also be seen in the entrenchment of overall fiscal deficits, which impose tax liabilities on future—and thus younger—citizens. In fiscal 2012, about $2.08 trillion of the total $3.5 trillion in federal spending—about 59 percent—was accounted for by the three major entitlement programs, plus interest on the debt. The fiscal challenge that confronts America in the next generation will only sharpen the young-versus-old tradeoff, because that challenge will be driven almost entirely by spending on the old as entitlement spending mushrooms with the aging baby boomers.
So what is the sequester cutting? Almost nothing from these entitlement programs that favor the old. Rather, it is imposing a 13-percent reduction in non-exempt defense spending and a 9-percent reduction in non-exempt non-defense spending. Virtually all of the key spending by America on its future, such as funding for research and development, infrastructure spending, and financial aid for higher education, falls into the category of non-defense discretionary spending. NASA, the National Science Foundation, National Infrastructure Investments, the Army Corps of Engineers—all federal programs that build the foundation of America’s future, all being cut.
Even before the sequester—and before the looming demographic pressures to come—the share of the federal budget accounted for by non-defense discretionary spending was at about a 50-year low. The sequester will drive it even lower.
America’s sequester has made a quiet, yet undeniable, statement about the country’s collective values moving even further from the young and toward the old. Amidst all of the finger pointing in Washington, this is the critical issue. Left overlooked for too long, it is destined to start coming up at dinner tables in households across America, as the “kids” challenge their parents and grandparents on America’s fiscal future. Here’s hoping Congress and the executive branch can reach a long-term budget agreement that truly invests in the future—and prevents intergenerational food fights along the way.
Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.
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John Ashburne T'81
Mar 15, 2013 at 8:55 am
In real, inflation adjusted, dollar terms, the size of the U.S. government is 8 times as large as it was in 1950 while the population has only doubled since then. More recently it is 3.7 times larger than it was after the enactment of medicare and medicaid during LBJ’s Great Society, 60% larger than it was in 2000 and 40% larger than it was in 2007. Again, these figures are all in real, inflation adjusted dollars.
The sequester was a blunt instrument intended to force Congress to address the very real problem of how quickly this nation’s deficit spending and federal debt is growing and they have failed to do that. The idea was that its effects would be so distasteful that Congress would work very hard over the ensuing 18 months to avoid the sequester.
The federal debt is currently $16.5 Trillion, larger than GDP, and is growing at 8% per year while GDP growth is 2%. This is not sustainable in the long run and Debt/GDP would be 190% within 10 years unless something changes, either in the rate of GDP growth or the size of the deficits.
A large portion of this debt is “internal”, which just means that current Social Security contributors (i.e. future beneficiaries) are lending the money and hope and expect that they will be repaid when it is time for their social security benefits to be paid. As long as refinancing is possible, this could work but the refinancing amounts, and therefore the risk, is increasing at an alarming pace.
So the questions that need to be addressed is what is the reasonable and rational size of government in our society, how do we pay for it and how do we establish priorities for what we need versus what we want? The cost of our federal government is running at about 23% of GDP and state and local government spending brings the combined total cost of government in this country up to about 45% of GDP.
Is there a limit as to how much we should spend on government and, if so, what is that limit? Can we really expect to be able to promise higher and higher entitlement spending programs without regard to how they will be paid for? Up until now, both sides of the aisle in Congress have focused only on wants and not needs and without regard for how this will be paid for.
We are borrowing more than a trillion dollars a year to pay for current consumption right now and expecting that the young and future generations will figure out a way to pay for it.
The U.S. is in the unique position of being the reserve currency of the world and thus has not experienced any negative effects of ballooning debt and a highly expansionary monetary policy from the Federal Reserve. This does provide the government with a great deal of flexibility in trying to stimulate economic growth but this money should be spent wisely and used judiciously. There is a limit to how much even the U.S. can borrow without creating another financial crisis.
The sequester is a bad program for a variety of reasons but the really bad consequence is that its very existence is a result of the failure of Congress to address the fiscal trainwreck that is looming unless something is done to control spending.