Remove the Arm to Save the Finger?

New report from the Congressional Research Service–entitlements are bankrupting the west. Well it doesn’t really say that–but the headliner is making rounds.

Yesterday a former co-worker e-mailed a copy of the 15 Apr 2013 Congressional Research Service, Trends in Discretionary Spending. It was accompanied by commentary ” It’s entitlements that are bankrupting the West…like they have for other societies for the last 6,000 years…decrease defense, increase entitlements = the end”.

Attention getting, interesting, after reading the report, equally untrue. The report says no such thing. It does however point out Discretionary Spending as a percent of federal outlays is getting to be a smaller piece of the pie compared to Mandatory Spending and Net interest. Social Security and Medicare make up the bulk of mandatory spending. Other Mandatory Spending programs include Temporary Assistance for Needy Families, Supplemental Security Income (SSI), unemployment insurance, some veterans’ benefits, federal employee retirement and disability, and Supplemental Nutrition Assistance Program and let’s not forget the salaries of House and Senate members. But let’s look at the problem.

Discretionary spending is limited by the Budget Control Act of 2011 (BCA; P.L. 112-25) reintroduced statutory limits on discretionary spending by imposing a series of caps on discretionary BA from FY2012 through FY2021. That act was supported by the same party’s  now howling. Revenue is down following major tax cuts over the last few decades and the economic contraction. Mandatory spending indeed rose as a result of the recession and unemployment, mostly leveled off but is requiring an ever increasing share of the GDP each year.

The message I received was “we need to cut entitlements”, but I see it differently. If we want a bigger discretionary slice, the options are: Increase the size of the pie through economic growth thereby increasing overall revenue; Getting people back to work reducing Mandatory Spending; Undoing the tax reductions demonstrated in recent posts not to improve the GDP, capital investment, or general wealth, thereby increasing the overall revenue pie; Repeal the Budget Control Act of 2011 allowing policy makers to adapt to economic conditions as needed; Reduce Mandatory (entitlement) portion of the pie; or some combination of these and other options.

Ah but there is much more to the report. While some may have a personal, philosophical, or party issue with entitlements most solutions are pretty basic. Simple adjustments to Social Security such as increasing the tax by a mere 1% this decade and raising the payment ceiling pretty much solve the issue over the long haul. A little deeper still we find another report from the Congressional Research Service, Mandatory Spending Since 1962. There we see the real increases, ” Federal mandatory spending on health care is projected to expand from 5.7% of GDP in FY2011 to 17.2% in FY2085 according to CBO’s extended baseline projection.” Social Security is projected to grow from 4.8% of GDP in FY2011 to 6.4% of GDP by FY2085.”

Yes you read it correct. Social Security is manageable, we do not have an “entitlement” spending problem, we have a cost of health care problem. Direct from the CRS report “health care costs per capita have grown far faster than the overall economy.”….”Medicare and Medicaid spending grew from 4.9% of total federal outlays in FY1970 to 23.2% in FY2011. CBO baseline projections show further increases in federal health spending will cause the Medicaid and Medicare share of total spending to continue to rise.”

So the “entitlement” sky is not falling after all. But it is time to take a look at the cost of health care, the real driver of Mandatory Spending increases. Let’s get our costs for in line with other developed countries and this “sky is falling” problem disappears like removing a wart….while saving the entire arm, let alone the finger.

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