The Looming Fiscal Car Wreck

car wreck

The WSJ Real Time Economics blog features a nice piece on CBO Director Douglas Elmendorf explaining how we’ve been able to avoid paying for our profligacy so far and why that’s about to change.

“The U.S. is entering unfamiliar territory in its level of public debt,” said Mr. Elmendorf. “It will be larger over the next decade than it’s been in half a century… and also unfamiliar by the standards of other developed countries.” The choice is not whether to change course from current policy, he noted, but “how quickly and in what way.” President Barack Obama has already declared a spending freeze on discretionary, nonessential outlays, but that only amounts to roughly 17% of total spending. Much of the rest of federal spending is for entitlement programs including Social Security, Medicare and Medicaid, defense spending and interest payments on the federal debt.

The size of U.S. entitlement programs has grown sharply since 1970, from 3.8% of GDP to 8.2% as of 2007, and is expected to hit 11.1% of GDP by 2020 thanks to an aging population of Baby Boomers and fewer workers in the system to help pay for their benefits.

Mr. Elmendorf said one reason entitlements have grown over the last few decades without being accompanied by an obvious increase in taxes or reduction in government spending is because defense spending, which few Americans directly observe, has fallen by half during the same period of time, to 4% of GDP in 2007.

That same pattern can’t be repeated in coming years, Mr. Elmendorf said. “We’ll have to pay for future growth in Social Security, Medicare and Medicaid through a visible increase in the tax burden, a visible reduction in other programs or a visible reduction in these [entitlement] programs themselves,” he said.

So, assuming health care reform isn’t the magic bullet the administration advertises, it looks as if we’re on a collision course with some pretty tough choices. Do you think we have the moxie to deal with it?

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