Budget Chaos: What, Me Worry?

Bill Frenzel and
Bill Frenzel
Bill Frenzel Former Brookings Expert
Ron Haskins
Ron Haskins Senior Fellow Emeritus - Economic Studies

April 7, 2008

When Bear Stearns faced bankruptcy, the story made headlines for a week. The federal government took unprecedented action. Analysts, policy-makers and scholars suddenly proposed a host of ideas for actions that could address the crisis immediately. Yet a much greater crisis that threatens the entire U.S. government with insolvency gets little attention — and virtually none from the presidential candidates. It goes unnoticed because we are just now entering the early stages of budget disaster.

The attitude in both the executive and legislative branches is reminiscent of the approach to the vicissitudes of life championed by Alfred E. Neuman of Mad Magazine: “What, me worry?” As a nation, we have entered the age of Alfred E. Neuman budgeting.

The problem is easily summarized. As the baby boomers begin to retire this year, the burden of Social Security, Medicare and Medicaid will grow relentlessly. We will experience an unprecedented increase in the number of people drawing benefits, and the most important benefits — medical care and long-term care — will themselves be growing faster than the nation’s economy.

These two forces — more people and more expensive benefits — will quickly produce disaster. As early as 2018, all the revenue of the federal government will be required just to pay for these three programs plus defense, homeland security, and interest on the federal debt. But then, who needs roads, bridges, national parks, research on global warming or investments in the children whom we are saddling with the bill for our own extravagance?

Small glimmers of hope have been appearing. David Walker, the just-retired head of the Government Accountability Office who tirelessly hectored Congress about the deficit, will now head a billion-dollar organization founded by former Commerce Secretary Pete Peterson to focus the attention of the American people and the Congress on the budget crisis. Last year, and again two weeks ago, the Medicare trustees declared that their projections show that Medicare spending will soon rely too heavily on general revenues (rather than the Medicare trust funds). This declaration requires the President to propose and Congress to consider remedial actions.

Another small spark that could ignite a conflagration took place last week at the National Press Club. A prestigious group of budget and policy experts, who are affiliated with think tanks that range from the Brookings Institution and the Urban Institute to the Heritage Foundation and the American Enterprise Institute, released a bombshell report that is equal parts diagnosis, prognosis and prescription. The single factor most responsible for the budget crisis is that the big three programs — Medicare, Social Security and Medicaid — are permanent entitlements. They are not subject to periodic review by policymakers; they just keep growing on automatic pilot.

“If you’re going to mortgage the future, do it in the dark,” is the federal motto. It goes nicely with “What, me worry?” In their session at the Press Club, the budget experts, who included three former heads of the Congressional Budget Office, proposed a dramatic reform that would constitute a major step away from budget chaos. Specifically, they proposed that: (1) Congress and the President enact 30-year budgets for Medicare, Social Security and Medicaid; (2) Congress review the budgets every five years; and (3) automatic program cuts or revenue increases be triggered if projected spending exceeds the budget.

This sensible proposal will produce two effects. First, Congress and the president will be forced to confront the nation’s descent into budget chaos. With honest scorekeepers, the outrageous condition of the long-term deficit will be revealed the moment the first 30-year forecast is published.

When Congress and the President confront the 30-year forecast, they will find that by the end of the period they will need a massive increase in revenues just to keep Medicare and Medicaid solvent. In short, it will become increasingly apparent that the federal government is promising benefits it cannot pay unless we’re prepared to make our children and grandchildren the most heavily taxed people in American history.

The second effect of the trigger proposal will then kick in. Congress and the president will realize they cannot achieve a 30-year sustainable budget for Social Security, Medicare and Medicaid by simply reducing benefits. Rather, the solution will require a combination of benefit cuts and revenue increases.

To achieve a budget bargain of this magnitude will probably require special procedures such as a bipartisan commission with recommendations that force a congressional vote. But whatever solution federal policymakers develop, the Social Security/Medicare/Medicaid triggers will have fired the opening salvo.

Or perhaps federal policymakers, including the presidential candidates, will simply continue ignoring the nation’s descent into budget chaos. If so, they should at least pass legislation requiring members of Congress and presidential candidates to wear Alfred E. Neuman campaign buttons.