Economics

Entitlement Spending Can be Constrained

Charles and Nick, I can’t subscribe to your view of the Republican candidates’ uncompromising stand against tax increases at last week’s Iowa debate. Like Peter Wehner and Norm, I am deeply disturbed that all of the candidates said they would reject a hypothetical deficit reduction agreement featuring $10 of spending cuts for each dollar of tax increases. I stand by my position (see here and here) that Republicans should be willing to compromise on tax increases in order to reduce entitlement spending.

As I pointed out, the additional government debt that will be issued if we fail to reach a deficit reduction agreement today must be serviced with tax increases or spending cuts in the future. Is there any real doubt that future presidents and Congresses will turn to tax increases for more than 10 percent of the financing? If so, then rejecting a 90-percent-spending-cut deal today actually increases the long-run tax burden.

Despite Charles’s claim to the contrary, there is such a thing as a real spending cut deal. To be sure, agreements to cut discretionary spending are hard to sustain over extended periods, because discretionary spending levels must be voted on each year and frequently change in response to unexpected developments. Even in this area, though, it’s possible to achieve some savings. The two Gramm-Rudman-Hollings laws and the Budget Enforcement Act restrained discretionary spending growth in the late 1980s and early 1990s.

In any case, it’s entitlement spending that really need to be restrained. Fortunately, agreements to cut entitlement benefits are more durable than agreements to cut discretionary spending. Because entitlement spending is not voted on each year, spending reductions remain in effect unless and until the president and Congress affirmatively pass legislation to overturn them. The historical record shows that real benefit cuts adopted in a bipartisan agreement can remain in place.

In 1983, Ronald Reagan signed a Social Security compromise that included both payroll tax increases and benefit cuts. One of the benefit cuts, a six-month delay in the cost-of-living adjustment, took effect as scheduled in the year of enactment. The largest benefit cut, an increase in the normal retirement age, may have initially seemed more vulnerable to backsliding because it wasn’t slated to take effect until decades down the road. Yet, the first stage of that increase, with the age rising from 65 to 66, has now taken effect. The second stage, with the age rising from 66 to 67, is still on track to take effect in upcoming years, with nary a proposal from either party to block it.

Besides, if there were no real spending cut deals, what would be the policy implication? That entitlements will be unilaterally cut by Republicans when they control all branches of government? Republicans’ track record offers no support for such a prediction. Or, that entitlements will never be cut? In that case, tax increases are unavoidable; blocking tax hikes today merely puts them off to the future and needlessly allows deficits to crowd out investment in the meantime.

In reality, entitlement spending can be restrained. But doing so almost always requires bipartisan agreement and therefore compromise. Of course, Republicans should insist on a good deal. But a 10-1 ratio is likely to meet that standard, at least if a significant portion of the spending cuts are to entitlement benefits.

A hard-line stance may offer some short-run political benefits, as evidenced by the resounding applause that the candidates received from the Republican audience last week. Unfortunately, an absolute refusal to accept tax increases today is likely to doom efforts to cut entitlement spending, guaranteeing onerous tax increases tomorrow.

One thought on “Entitlement Spending Can be Constrained

  1. Finally, a voice of reason on this matter. Thank you Alan Viard for pointing out the fallacy of the “Congress can’t be trusted to cut expenses under any circumstances” mentality. This ridiculous excuse sounds oh-so appealing at first blush, until you realize it only leaves you with one option to close the deficit–which is raise taxes! If ever there were a case of conservative demagoguery painting itself into a corner, this is surely it.

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