It’s that time of year again. No, I don’t mean summer vacation and barbeques. It’s the time of year when Congress debates raising the U.S. debt limit.
Each year Congress wrangles over tax and spending issues, and the necessary vote required for the sale of new government bonds. This regular debate is only necessary because the federal government spends more than it takes in each year from taxes, something it has being doing every year now since 2001.
Just as you may not want to talk politics at your family barbeques this summer, leaders from both political parties don’t seem willing to talk about their big spending items – entitlements. No one seems to know what to do about the government’s growing expenditures for Social Security, Medicare and Medicaid.
The Congressional Budget Office reports that the federal government will spend $4.4 trillion this year, of which $2.7 trillion will go to entitlements. An additional $382 billion will go to interest on current debt. This means only 32 percent of the budget is available for defense and other government priorities.
This fiscal deficit issue can only be addressed by reforming these long-run budget commitments. Entitlement programs add to the federal debt, which is now more than three quarters of the country’s annual gross domestic product and is forecasted to rise.
A basic principle of economics is often aptly stated as, “There is no such thing as a free lunch.” Rising entitlement programs are costly, even when the government simply borrows to fund them.
The current expenses for these entitlements are a direct tax on the working young, as payroll and income taxes are higher than they would be otherwise. Spending on these programs also serves as an indirect tax on everyone else, since government resources are diverted from infrastructure projects or other programs. Just as taxes would, an increase in the federal debt pulls funds away from the private sector and crowds out capital investment.
Some economists argue that we should not worry about debt because interest rates remain at historic lows. This argument is necessarily wrong, but it is also not relevant. The more the government borrows the less capital there is available for households and businesses. Again, it is just like taxes – taking money out of the private sector.
Let’s talk about it. We can’t expect much to change, and for our economy to continue growing well, unless policymakers are willing to talk about entitlement spending and the debt that’s being used to fund it.
Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa.