The Corner

It’s a Spending Problem

When talking about the fiscal problem we face, Democrats and Republicans have to start from the same set of figures, which by Washington convention is usually a set of Congressional Budget Office figures about government spending and revenue. From there, Republicans tend to argue that we need to significantly reduce spending to avoid a disastrous explosion of debt while Democrats tend to argue that we need to increase taxes to make up the fiscal gap. It is polite and customary for reporters covering that debate to then suggest that these are basically two equivalent ways to get at the problem and surely some combination will do the trick. But as we emerge from the universal confusion of the fiscal-cliff debate, it’s important to understand just how significant the mounting deficit and debt problem will be, and just how different are the roles that spending and revenue play in that problem.


Let’s start with the Obama tax bill enacted yesterday. This was the tax increase on the rich that the Democrats have yearned and clambered for and which has been almost the entirety of the president’s fiscal agenda for four years. What effect will it have on the deficit? Here’s a quick chart made from CBO’s score of the bill compared to their last current-policy baseline:



That should do it, right? And these projections are based on a pretty rosy set of economic assumptions. If growth is slower than CBO projects (which it has been in recent years), then revenue will be lower and spending will be higher. So after all that sound and fury, all the effort and the drama, the great Democratic achievement of the fiscal cliff showdown amounts to essentially nothing in terms of even the near-term fiscal problem.


And of course, the longer term problem is far greater. When you look at where spending is going, the idea that you could possibly chase it with tax increases becomes just truly preposterous. Here are CBO’s spending and revenue figures for the past 40 years and their projections for the next 40 (which of course grow rougher the further out you go):



As this makes clear, the idea that you can leave today’s spending trajectory in place and pay for it with rising taxes is just a fantasy. Revenue is now a bit below its postwar average, but a return to that level (which CBO projects, again based on potentially dubious expectations of robust growth) would do precious little to address our coming fiscal calamity. What you see here is a spending problem, and it requires a spending solution. That’s not a matter of ideological preference but of the actual nature of our budget trends.


And it is also a very particular kind of spending problem: It’s an entitlement problem and especially a health-entitlement problem. Here’s a final chart, from the same CBO data:



This is the problem to be solved. And it cannot be solved with tax increases, for reasons both political and economic. The Democrats have spent years arguing for a tax increase on the wealthy, now they’ve gotten it and basically gained nothing in the fiscal debate, and they aren’t getting any more tax increases. So can we get to work on the actual problem?


We need to reform our health-entitlement programs. Republicans have proposed a series of ways to do so, but need to do more to turn those large ideas into discrete incremental steps that could be started soon. Democrats have made clear they don’t like those conservative approaches, but what do they suggest instead?  Now that they can no longer pretend that raising taxes on the rich will solve the problem, might we finally have an argument about entitlement reform?

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.


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