Lawrence Summers’ (Unintentional?) Case for Entitlement Reform

Today’s Washington Post includes an opinion column from Lawrence Summers, the former Harvard President, Treasury Secretary (under Clinton) and economic adviser to President Obama (2009-2010), entitled “The reality of trying to shrink government.”  Perhaps unintentionally, the column forcefully underlines why important government programs such as Medicare, Medicaid, and Social Security must be fundamentally reformed, and soon.

According to Summers, while “there is a widespread view in both parties that it is feasible and desirable that in the future the federal government should be no larger as a share of the overall economy than it has been historically,” that is “unlikely to be achieved,” for a variety of reasons:

  1. Demographic changes and increases in life span mean that the proportion of the elderly in our population will dramatically increase, from 1 elderly person for every 4.6 workers (the current ratio) to 1 for every 2.7.  (For comparison purposes, the ratio in 1940, as Social Security was just being implemented, was 42 workers per retiree.)  According to Summers, the result will be a 5.6% increase in federal spending;
  2. As debt piles up and interest rates return to historical norms from their current, artificially low positions, the amount the government spends on debt service will significantly increase – from 1.7% of GDP in 2007 to 3.2% of GDP in 2020.  Note, Summers presents this increase as a percentage of GDP; as the GDP in 2020 will likely be far greater than the GDP in 2007 – 2007 GDP was $13.8 trillion,  while the CBO projects a 2020 GDP of $22.8 trillion – meaning the real dollar difference he is predicting will be much greater than a 1.5% increase.  In raw dollars, he is talking about spending increases of $495 billion;
  3. The costs of goods and services paid for by government tend to inflate at a higher rate than the costs of other goods and services, meaning that federal spending, relative to GDP, will need to rise by at least another 3%;
  4. We have been putting off necessary expenditures on infrastructure and future liabilities (such as pensions), and those expenditures can’t be put off for ever.  When we finally start spending on them, government spending will increase;

Based on this, Summers concludes:

[F]or the next three decades the United States will confront the reality that major structural changes in its economy will compel an increase in the public sector’s fraction of the total economy unless the functions that the federal government has long performed are substantially scaled down

All of this, together, is a powerful argument that “the functions that the federal government has long performed” must be “substantially scaled down.”  In fact, if it weren’t for Summers’ background, and the fact that he opened his column by asserting that decreases in spending were unlikely to happen, I’d have assumed that was the argument he was making.  It may well have been.

Regardless of Summers’ intent, however, the facts he highlights are cold, hard, and must be dealt with.  Medicare, Medicaid, and Social Security cannot be allowed to continue on their current path; if they do, they will eventually and inescapably swamp the economy that provides their funding.

And that is, without doubt, a hard truth.  Medicare, Medicaid, and Social Security are the products of laudable policy goals and morally valuable priorities – the need to care for those less fortunate than the general population, for the vulnerable who cannot (not merely will not, but cannot) care for themselves.  But the choice we face is not between having those entitlements and losing them.  It is between losing them without destroying the economy (i.e. cutting them now, by choice, and in the least painful ways possible, while replacing them with more sustainable programs that achieve some if not all of the same policy objectives), or losing them when they destroy the economy, and take the rest of the country down with them.

Put it that way, and it’s really no choice at all, is it?


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