The U.S. Does Not Have a Spending Problem, We Have a Distribution Problem

Forty years from now, America will be twice as rich on average as we are today. But most of that wealth will go to the very richest households. We only have a budget crisis if they refuse to pay higher taxes.

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Gina Sanders/Shutterstock

In this season of fiscal silliness, many people are saying that we cannot afford our current entitlement programs. They shake their heads solemnly and say that Social Security and Medicare were well-intentioned ideas, but we simply do not have the money to pay for them and there is no escaping the need for "structural changes."

Hogwash.

Yes, federal government spending on Social Security and particularly Medicare is projected to grow, as a share of the economy, over the next several decades. That's because our population is aging and health care is becoming more expensive. As a result, spending on entitlement programs is growing faster than tax revenues. This creates the perceived need to cut spending, most notably in Paul Ryan's plan to convert Medicare into a voucher program--whose vouchers are designed not to keep up with actual health insurance costs.

This kind of cost-cutting doesn't do Americans any good. Health care is something people need. If the government pays for less of it, then either seniors will pay for it directly, and we'll simply have shifted costs from taxpayers as a whole to the elderly--or seniors won't be able to afford it, and we'll have balanced our budget on their backs.

More fundamentally, it's a mistake to fixate on the federal government's budget and ignore the aggregate budget of the American people. The federal government exists to serve the American people, not the other way around. The real question is whether we as a society can afford our current level of entitlement spending.

The answer is obviously yes.

This chart shows real per capita GDP--the total value of all goods and services that we produce, divided by the population--as projected by the CBO. (The data are from the supplemental tables to the CBO's June Long-Term Budget Outlook.)

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Because this is per capita GDP, it already takes into account the fact that a growing share of the population will be retired. And because it is real (inflation-adjusted) GDP, it already takes into account the fact that everything, including health care, is getting more expensive.*

In other words, in the future, we will be able to afford all the health care we consume today, plus all the other stuff we consume today, and then some. That means that, for example, seniors can enjoy the same level of health benefits that they enjoy today, and the rest of us can still be better off than we are now. And it isn't even close. Forty years from now we will be, on average, twice as well-off as we are today.

The key words in that sentence are "on average." As a society, we will produce far more than enough goods and services to preserve Social Security and Medicare in their current form without making younger people worse off. But these programs will consume a growing share of total societal resources, and since they are administered by the federal government, that requires higher taxes.

So the real point isn't that we can't afford Social Security and Medicare. It's that some people don't want to pay the higher taxes necessary to maintain Social Security and Medicare. This is a question of distribution, pure and simple.

At first blush, it may appear that young people don't want to pay for retirement benefits and health care for old people. But most of us will be both young and old at different points in our lives, so we're on both sides of the transfer. The real issue is that Social Security and Medicare are risk-spreading programs, which means that rich people** end up subsidizing poor people.

When people say that we can't afford our entitlement programs, they're really saying that rich people won't pay the taxes necessary to sustain our entitlement programs. To be fair, many rich people probably would be willing to pay higher taxes if they knew the facts. But a small number of extremely rich people have successfully spread the myth that we can't afford our entitlement programs.

Decades ago, Congress decided that anyone who worked for ten years, and his or her spouse, deserved a basic level of health insurance. If they deserved it then, there's no reason they won't deserve it in the future. And as a society, we can easily pay for it. The reason we're talking about cuts to Social Security and Medicare is that some very influential people don't want to pay for it--and they've convinced everyone else that we can't pay for it. 

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*The Consumer Price Index, the most common measure of inflation, calculates the change in the price of a fixed basket of goods and services. If real per capita GDP is bigger in one year than in the previous year, it means that the average person can buy the same amount of goods and services as the year before and have money left over.

    ** That is, people who turn out to be rich after the fact. Most people do not know, when they enter the workforce and begin making payroll tax contributions, whether they will turn out to be rich or poor.

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    Presented by

    James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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    James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.

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