Hmm? Entitlements aren’t crowding out investments??

August 3rd, 2012

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Dylan Matthews posted on our paper this afternoon, and we appreciate the opportunity to continue the dialogue. So let’s get started.

Should Social Security be left out of this discussion, as Mr. Matthews suggests? Is it really only the health care entitlements we need to contain?

He is correct, and we showed in our paper, that over the past 50 years, all of Social Security’s growth relative to GDP has occurred in the first 20 years and has stayed roughly static since. But five percent of the economy is a lot. It’s roughly equal to Medicare, Medicaid and CHIP combined. And it’s not going to stay static – that is a certainly. In less than two decades, Social Security is poised to jump from 5.0% to 6.0% of GDP, according to CBO. One point may not seem like a big deal, but it represents a 20% rise in the cost of Social Security relative to the size of the economy. That’s not peanuts, especially since (as Mr. Matthews rightly points out and we also show in our paper) our health care entitlements will sprint ahead much faster.

Mr. Matthews next argues that it’s not entitlements that crowded out investments; it’s the end of the Cold War. He points out that investment spending out of the Defense Department experienced a decline steeper than non-Defense investments.

Sure, but non-defense investments have suffered as well. Between 1963 and 1981, non-defense investment spending represented between 10.6 and 14.5 percent of all federal spending. After 1981 it never reached 10% again. That’s 31 consecutive years of domestic investment spending below 10% of federal outlays, following 19 consecutive years of plus-10%.

So yes, the Cold War’s conclusion reduced some defense-related investments, but let’s not be so sure that entitlements didn’t contribute to this as well. Why? There is a limit to what people will allow the government to spend without storming the barricades. That’s what gave us Ronald Reagan, Ross Perot, the Contract on America, Pay-Go rules, sequestration, the Tea Party, and the debt ceiling fiasco. Try to pass a bill in Congress today to add a few shekels to fund basic research. It can’t be done. Look at the Budget Control Act passed by Congress and signed by the President – it is projected to further reduce investment spending as entitlements roll along on autopilot. By 2022, investment spending (including defense) will be one-sixth what we spend on the major entitlements. Increasingly, these two areas of the budget – both of which are critical priorities for America, born of Democratic Presidents and Congresses – are locked in a zero sum game.

On his last point, we agree – public investments are not created equal. And as we noted in our paper, “we understand that there are numerous factors affecting the nation’s growth.” But we stand by the overall point that investments matter to growth and overall prosperity. Highway systems matter, pure research matters, defense breakthroughs matter, and aid to public schools matter. The question is, when one looks out into the future, will we be able to have enough to invest in young people, old roads, new ideas, and nascent industries?

We fear the answer is no. And while we share the view that a future budget deal must include a significant increase in revenue, we cannot ignore that entitlements are crowding out our ability to invest. Our hope with this paper is not to denigrate entitlements but to enlist the Party that created them, nurtured them, and expanded them to take the lead in humanely reforming them. As Baby Boomers start to retire, it is getting harder to budget for both growth and security.

Jim Kessler

Senior Vice President for Policy, Third Way