The Corner

Autopilot Programs Will Squeeze Out Everything Else

You have heard it before, but it bears repeating: Even under very rosy assumptions, the growth of Social Security, Medicare, Medicaid, and interest on the debt will squeeze out all other spending going forward. This week’s chart makes that point.

It looks at the projected composition of federal spending from 2010 to 2084 using data from the Congressional Budget Office’s most recent Long-Term Budget and Economic Outlook. The costs of the largest mandatory programs (Social Security, Medicare, and Medicaid) and interest on the debt are plotted in blue; all other spending is shown in red. These components of federal spending matter not only because of their magnitude, but also because they are on autopilot. Unless lawmakers in Congress reform current laws, federal spending will continue to grow.

As a result of this automatic spending, we will face two major consequences: First, smaller portions of federal spending will be under lawmakers’ functional control. As we can see here, the proportion of federal spending under lawmakers’ control is projected to collapse over time. According to the CBO, this year, $0.48 of every dollar of federal spending will be devoted to Social Security, Medicare, Medicaid, and net interest spending. By 2084, that will have risen to $0.90 of every dollar the federal government spends. This means that only $0.10 of every dollar of federal spending will be available to fund everything else.

Second, we will face gargantuan deficits into the foreseeable future; just because this chart fits in a neat rectangle, that doesn’t mean there will be money to pay for all this spending.

We should expect these two elements to have significant negative impact on economic growth. More government spending shrinks the private economy. Secondly, more spending and wider deficits will mean more borrowing and more debt. That in turn reduces the amount of savings devoted to productive capital and thus will result in lower incomes than would otherwise occur.

Higher debt also means higher interest payments. In theory, larger deficits simply require tax increases or spending cuts to make fiscal policy sustainable. However, our investors understand that these options are very unpopular and that instead lawmakers will likely revert to printing money. Hence, they are likely to ask for an inflation premium in the form of higher interest rates (probably on top of rate increases triggered by the fact that the more in debt we are, the closer we are to the point where our investors change their perceptions about our ability to pay them back). Higher rates will mean higher interest payments and slower economic growth, and higher debt and slower growth makes it harder for policymakers to respond to unexpected problems, such as financial crises, recessions, and wars.

All of which means that the reality will be much worse than this chart shows, since these projections assume that interest rates on the debt will remain low. Here are some projections of what interest rates could end up really looking like and what those rates would mean for federal spending and the deficit. For more on this issue, you should check this excellent piece by the editors of e21 called “The Next Entitlement Program: Interest on the Debt.”

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

Most Popular

Politics & Policy

The Origins of Progressive Agony

What has transformed the Democratic party into an anguished progressive movement that incorporates the tactics of the street, embraces maenadism, reverts to Sixties carnival barking, and is radicalized by a new young socialist movement? Even party chairman Tom Perez concedes that there are “no moderate ... Read More
Elections

How Will the Senate Races Break?

How will the Senate races break? We have less public polling to go on than in recent years, so answering that question is harder than ever. But the news is more optimistic for Republicans than it was a month ago.   Waves and Breakers Four years ago, I projected in mid September that if “historical ... Read More
PC Culture

Warren Is a Fraud

Senator Elizabeth Warren (D., Mass.) has been telling a story for years. It’s a deeply romantic story about her parents and their young love, fraught with the familial bigotry of an earlier time. Here’s how she told it this week in a video she released in preparation for her 2020 run: My daddy always said he ... Read More
U.S.

Two Minnesota Republican Candidates Assaulted

Two Republican candidates for state office in Minnesota have been physically assaulted in recent days, leading prominent Republican lawmakers to caution their Democratic colleagues against employing inflammatory rhetoric. Republican state representative Sarah Anderson was punched in the arm last week after ... Read More
Law & the Courts

A Christian Man Receives Justice

A good man’s legal ordeal is at an end. Yesterday, my friends and former colleagues at the Alliance Defending Freedom announced that former Atlanta fire chief Kelvin Cochran had reached a $1.2 million settlement, ending a case he brought after the city fired him for writing -- and distributing to a select few ... Read More