Monday, December 26, 2011

Suck it up Washington before a crisis out of your control defines our fiscal policy

Robert Samuelson at Newsweek makes a couple of good points in his article entitled A Country in Denial About Its Fiscal Future.  During the past half century, the percentage of the federal budget paid out to individuals (e.g. Medicare) has more than doubled from 26% to 66%.  At the same time, Military spending has been cut more than in half from 52% to 20%, so it is easy to see where the shifted resources came from.  Amazingly, as a percentage of GDP, the federal tax burden has remained about the same (17.8% in 1960 and 18.5% today).  The problem is that we cannot cut the non-individual services much more at all.  So something has got to give if the boys in Washington keep on the same trajectory.  Samuelson puts it well:
We are shifting from "give away politics" to "take away politics." Since World War II, presidents and Congresses have been in the enviable position of distributing more benefits to more people without requiring ever-steeper taxes. Now, this governing formula no longer works, and politicians face the opposite: taking away -- reducing benefits or raising taxes significantly -- to prevent government deficits from destabilizing the economy. It is not clear that either Democrats or Republicans can navigate the change.
So what happens if they cannot navigate the change?  It will be imposed upon them and that is not likely to result in a lot of great alternatives.

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