Federal Spending Is Not Trapped by the Social Safety Net

Aug 2, 2012James K. Galbraith

Setting the record straight on the math around entitlement programs.

The nub of Bill Keller's recent essay on why Social Security, Medicare, and Medicaid must be cut is a graph – taken from a report by a group called Third Way – that compares federal “investments” with “entitlements,” showing that one is in decline and the other is on the rise. As a baby boomer, former Executive Director of the Joint Economic Committee, and an economist concerned with military matters (I chair the Board of Economists for Peace and Security), my antennae went up immediately.

Note, as Keller acknowledges, that the federal budget counts weapons systems as “investments.” Back in the 1960s, we were building nuclear bombers, submarines, missiles, and warheads; today we are downsizing that arsenal, happily unused. Does Mr. Keller really think that those “investments” had anything much to do with economic growth? If so, he's misinformed.

Even today, military procurement is around 40 percent of total federal “investment” – $221 billion out of about $540 billion in 2011, according to the Special Analyses in the Budget. Whatever you think of the F-35 and F- 22, it's just silly to add that number to (say) federal aid to education, another component of investment. The sum is not a gauge of anything.

On the budget, Mr. Keller then asserts that “the arithmetic simply doesn't work.” He does not explain, but no matter; he's again misinformed. How do we know? Partly because the markets have full confidence in the US fiscal position – evidenced by record low long-term interest rates. And if you don't trust the markets, you can also look at the numbers, as I do here.

In reality, an older population is partly the result of the great success of Social Security, Medicare, and Medicaid, which have since the early 1970s protected elderly Americans from destitution. Naturally, they live longer. And as the elderly become more numerous, the payout of the programs that support them must rise. There is nothing wrong with this. And it is wholly sustainable. The right measure is the share of total spending on this population in total GDP; Social Security (OASDI) was under 4.5 percentage points in 2009 and is projected to rise to 6.5 percent over the next 75 years. By what conceivable argument is this a crisis? (For a detailed discussion of the question of “burden” see my testimony to the Federal Accounting Standards Advisory Board, February 25, 2009, co- authored with Warren Mosler and Randall Wray, available on request.)

Mr. Keller's proposal for a higher retirement age deserves a word. Today, a very high share of Social Security recipients take the early retirement option at 62. Raising the “retirement age” is just a benefit cut for these most vulnerable, lowest-paid workers. It's the cruelest and most dishonestly presented of all so-called Social Security “reforms.”

As for health care costs: yes, they should be controlled. But to attack Medicare specifically is to target the elderly for cuts simply because they happen to have a public insurance program. Keller's proposals would (mostly) apply to Medicare and non-Medicare funded care alike, which is a step in the right direction -- taking us away from the notion of “entitlement reform” in this area. But he is not careful enough to admit this.

These are simple points, whose validity I believe anyone can judge.

James K. Galbraith is the author of 'The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too'. He teaches at The University of Texas at Austin.

 

Social Security image via Shutterstock.com.

Share This