A debt crisis is coming.But don’t blame entitlements

A group of distinguished economists from the Hoover Institution, a public-policy think tank at Stanford University, identifies a serious problem. The federal budget deficit is on track to exceed $1 trillion next year and get worse over time. Eventually, ever-rising debt and deficits will cause interest rates to rise, and the portion of tax revenue needed to service the growing debt will take an increasing toll on the ability of government to provide for its citizens and to respond to recessions and emergencies.

None of that is in dispute. But the Hoover economists then go wrong by arguing that entitlements are the sole cause of the problem, while the budget-busting tax bill that was passed last year is described as a “good first step.”

Entitlement programs support older Americans and those with low incomes or disabilities. Program costs are growing largely because of the aging of the population. This demographic problem is faced by almost all advanced economies and cannot be solved by a vague call to cut “entitlements” — terminology that dehumanizes the value of these programs to millions of Americans.

The deficit, of course, reflects the gap between spending and revenue. It is dishonest to single out entitlements for blame. The federal budget was in surplus from 1998 through 2001, but large tax cuts and unfunded wars have been huge contributors to our current deficit problem. The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending. This year, revenue is expected to fall below 17 percent of gross domestic product — the lowest it has been in the past 50 years with the exception of the aftermath of the past two recessions.

All of us have supported corporate tax reform. The statutory tax rate was too high, much higher than in other Organization for Economic Cooperation and Development economies. However, because of deductions and breaks in the tax code, the effective marginal tax rate was similar to the average among competitor economies. The right way to do reform was to follow the model of the bipartisan tax reform of 1986, when rates were lowered while deductions were eliminated.

Instead, the tax cuts passed last year actually added an amount to America’s long-run fiscal challenge that is roughly the same size as the preexisting shortfalls in Social Security and Medicare. The tax cuts are reducing revenue by an average of 1.1 percent of GDP over the next four years. The Hoover authors minimized the cost of the tax cuts by noting that if major provisions are allowed to expire on schedule — certainly an open question, given political realities — they would amount to “only” 0.4 percent of GDP. Even this magnitude exceeds the Medicare Trustees’ projections of a 0.3 percent of GDP shortfall in Medicare hospital insurance over the next 75 years.

Just as entitlements are not the primary cause of the recent jump in the deficit, they also should not be the sole solution. It is important to use the right wording: The main entitlement programs are Social Security, Medicare, veterans benefits and Medicaid. These widely popular programs are indeed large and projected to grow as a share of the economy, not because of increased generosity of benefits but because of the aging of the population and the increase in economywide health costs.