Wednesday, November 24, 2004

Douglas Holtz-Eakin

Douglas Holtz-Eakin, director of the Congressional Budget Office, spoke here on Monday. I heard him give much the same speil last year, but it remains as pressing as ever. Once he got beyond his lines about how the budget doesn't look so bad over the next five years if nothing else changes, he got into the rather depressing news about how things look 10, 20 or 30 years out. And they don't look good. First tax cuts: if the tax cuts become permanent, then that creates a permanent deficit of 2% of GDP. Second, social security. I don't necessarily think that the solution is so complicated, but if nothing is donem after 2030, things become quite problematic. Basically, it is no longer self-financing and will suck money from the rest of the federal budget. He emphasized that any solution has to pay out about $12 trillion (!) in what people have already payed in, or something like that, and that while politicians will try to avoid this reality, it cannot happen. Third, medicare and medicaid will become increasingly expensive. Historically, those costs have increased 2.5% per year faster than GDP and there is no reason to suspect that this will change. Then by 2020, Medicare and Medicaid would be about 20% of GDP (not government, so the same size as government is today). He pointed out that this seems to unreal, that people think something has to be wrong with the numbers and so don't take it seriously, but it is serious! Also, in questions someone asked about socialized medicine. He sort of avoided the question, but in doing so pointed out that those European countries have seen their costs rise at a rate similar to the U.S. So while socialized medicine may have other benefits, namely, keeping level of health care expenditures down, it is not a simple solution to keeping the change over time in health care costs down. Finally, defense spending, not including the war in Iraq and the war on Terror, is set to increase dramatically in the next fifteen years. In the 1990s, the military cut back on replacing equipment, thus the peace dividend, but now that has to be done. ALso, the Pentagon wants to transform the military with investments in new technology. This will cost much. Add in expenditure on Iraq, and that's a hell of a lot more money than we currently have flowing through the system.

The take away message was that if nothing is done, what makes America great -- small government, low and efficient taz system, and flexibility in the economy -- will be placed in jeopardy. And he said, maybe this Congress will address Social Security, but the odds of it addressing more pressing and dangerous things, like health care, are quite slim. So there you have it: the man who delivers bad news.

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