Health entitlements threaten US long-term growth

Here’s the scary news: 

“In Decem­ber 2007, the Con­gres­sion­al Bud­get Office (CBO) pub­lished The Long- Term Bud­get Out­look, which pre­sent­ed a long-term pro­jec­tion of the bud­get under an ‘alter­na­tive fis­cal sce­nario,’? rep­re­sent­ing one inter­pre­ta­tion of what con­tin­u­ing today’s under­ly­ing fis­cal pol­i­cy would mean. CBO pro­ject­ed that, under that sce­nario, spend­ing on Medicare, Med­ic­aid, and Social Secu­ri­ty would rise rapid­ly, and fed­er­al out­lays exclud­ing inter­est (pri­ma­ry spend­ing) would climb from about 18 per- cent of GDP in 2007 to 28 per­cent in 2050 and to 35 per­cent in 2082… Because the sce­nario also assumes that rev­enues as a share of GDP would not increase much over the 75-year peri­od, CBO pro­ject­ed that the fed­er­al bud­get deficit and fed­er­al debt held by the pub­lic would rise sharply. By CBO’s reck­on­ing, fed­er­al debt under that sce­nario would climb from about 37 per­cent of GDP in fis­cal year 2007 to more than 290 per­cent in 2050—a large fig­ure by any stan­dard. Since the found­ing of the Unit­ed States, fed­er­al debt sur­passed 100 per­cent of GDP only for a brief peri­od dur­ing and just after World War II…”

The rem­e­dy? Tax rate hikes alone are infeasible:

…tax rates would have to be raised by sub­stan­tial amounts to finance the lev­el of spend­ing pro­ject­ed for 2082 under CBO’s alter­na­tive fis­cal sce­nario. With no eco­nom­ic feed­backs tak­en into account and under an assump­tion that rais­ing mar­gin­al tax rates was the only mech­a­nism used to bal­ance the bud­get, tax rates would have to more than double.”

So some mix­ture of tax increas­es and reduc­tions in health care enti­tle­ments will be nec­es­sary to avoid a seri­ous blow to eco­nom­ic growth.

Because Con­gress holds the key to long-term fis­cal bal­ances in the USA, set­ting tax rates and enti­tle­ments, they will be respon­si­ble for pass­ing the laws need­ed to avoid the prob­lems. But more than half of the Mem­bers of Con­gress must stand for elec­tion every two years: they seem to have more incen­tive for short-term man­age­ment of the bud­get than any oth­er pop­u­lar assem­bly on earth. They could not agree to deal with a dete­ri­o­rat­ing fund­ing out­look the Social Secu­ri­ty sys­tem in 2005–6. So what is the out­look for the more press­ing health care deficit?

I found the ref­er­ence to the CBO pro­jec­tions on Greg Manki­w’s blog.

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