The status quo is not an option: It's time to make hard choices


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By Paul R. Cullinan In recent issues of the Prairie Fire, the coming fiscal calamity facing the United States has been described and decried by a diverse set of respected policy analysts and former public officials. If federal spending policies are not changed, the country can expect the government to claim an ever-increasing share of the country’s resources either through higher taxes or greater borrowing (essentially requiring future tax hikes). Given an aging population and health-care costs that grow much faster than income, tax rates or debt levels would eventually get sufficiently high to discourage Americans from working and saving and foreign investors from buying American debt. But the train wreck is not inevitable, nor are policymakers going to forever kick the can down the road. However, the longer decisions are delayed, the fewer choices remain viable. The time to act is upon us. Americans must avoid the temptations from those who would advocate the quick fixes or painless solutions, for such strategies rarely turn out to be either. Like so many of the diet and weight-loss ads, the hard work necessary to achieve the desired outcome is buried in the small print (e.g., to achieve the weight loss, one actually has to exercise. Ugh!). Eliminating waste, fraud and abuse, while highly commendable, would be only a relatively small step in controlling spending. Withdrawing the troops from Iraq would significantly reduce defense spending in the near-term[1], but the long-run spending problems flow primarily from entitlement spending, especially for health care. Eliminating the Bush tax cuts won’t do the trick because those projections that incorporate that policy continue to show a growing imbalance between spending and revenues. So let’s put all the cards on the table. First, taxes will have to be higher than in recent years, potentially much higher. Over the past 40 years, spending has exceeded revenues by 2.4 percent of the Gross Domestic Product (GDP), equivalent to about $330 billion in 2007. Consequently, the publicly held federal debt increased by $4.8 trillion over that period, the repayment of which constitutes a levy on future taxpayers. And that explosion of debt was before the baby boom begins to leave the labor force and collect Social Security and Medicare benefits. Remember that the population 65 and over will nearly double over the next three decades. King Canute could not stop the tides, and neither should we think that we can withstand the rising tide of spending while limiting ourselves to historical levels of taxation. The additional debt service alone will overwhelm us. One should not automatically think about higher marginal income tax rates, however. As Joseph Minarik pointed out in a recent Prairie Fire article, to simply ratchet up those rates would be to exacerbate the inefficiencies and inequities in that system and to offset the beneficial effects of lower deficits. Beyond some of the options addressed by Minarik, we could look to new sources such as a carbon tax or an auction of cap-and-trade permits that would not only raise revenues but also encourage more energy-efficient production and consumption that would reduce the emission of greenhouse gases. But taxes cannot be relied on to do the job alone. Second, health-care entitlement programs will have to be redesigned to slow the growth rate of spending, improve efficiency and effectiveness, and ensure access to necessary care. Rapidly rising health spending is an important (if not the most important) factor crowding out other forms of public spending and dampening the earnings growth of Americans with employment-based coverage. And even among the elderly where coverage is nearly universal, the Medicare actuaries project that Medicare premiums and cost sharing will claim two-thirds of the average Social Security benefit by 2080, up from 25 percent today. Despite the burden that health-care costs impose on American families, the efficacy of those expenditures is unclear as America trails much of the developed world in health outcomes ranging from infant mortality rates to life expectancy to obesity rates. Although much of the focus has been on federal health programs such as Medicare, effective restraint of federal health spending may require reform of the entire health-care delivery and financing “system” as excessive cost growth occurs throughout the health sector. Moreover, significantly different growth rates for publicly and privately financed health insurance that could flow from efforts to restrain public programs hold forth the specter of a two-tier health-care system. Third, Social Security needs to be revised to address the requirements of the 21st, not the 20th, century. Healthier working lives mean that the model designed for a time when the requirements of most jobs were far more physically demanding will have to be revamped. Longer life expectancies at age 62 and beyond result in longer periods over which benefits are paid. (How many Americans are aware that in terms of the number of years of Social Security retirement benefits claimed by a man reaching age 65 has increased by more than 10 percent—15.8 to 17.5—since 1990 and is projected to increase another 14 percent by 2050.) These health improvements call for reexamining the balance between work and retirement in a manner that would encourage longer working lives. Fourth, many of the same forces that will generate spending pressure at the federal level also will impose increased strain on state and local governments. Promises of health-insurance coverage for retirees are unfunded, and pension benefits are often underfunded—problems shared with private-sector employers as well. Those claims on limited resources will be joined by increased demands for infrastructure investments (the replacement of roads, bridges, and water and sewer systems, among others) with the results that the limits of the revenue bases available to those governments will be severely tested. Getting control of government budgets must be considered an objective where “failure is not an option.” If we are incapable of achieving that, America’s future—one which depends on the availability of a flexible, highly trained workforce—will be bleak. The nation’s investment in the workforce of the 21st century is already diminishing at a time when it should be increasing. Federal funding for early childhood, elementary and secondary education (in 2008 dollars) has fallen from $50 billion to $44 billion since 2003 after adjusting for inflation[2]. Spending on training and employment services has dropped by more than 17 percent over the same period. If we continue to shortchange these activities, we will be hard-pressed to achieve the modest 1.7 percent annual growth in productivity assumed by the Chief Actuary of the Social Security Administration in his long-term projections. If productivity growth were to be only 0.5 percentage points slower than projected over the next four decades, the overall economy—out of which we will have to finance all public and private endeavors—would be nearly one-fifth smaller. Tough decisions have been put off too long. Changes in the 21st century will occur much more rapidly than in the past, and the workforce will have to be much more highly trained and flexible in order to respond to those challenges. We owe that not just to the generations of Americans to come, but also to ourselves. For if the workforce of tomorrow falters, the prospect of a comfortable retirement for most Americans will be fleeting. More than two centuries ago when the American experiment was about to be launched, Ben Franklin offered that “we must, indeed, all hang together or, most assuredly, we shall all hang separately.” I suggest that proposition is just as appropriate today. Getting our fiscal house in order is in the best interests of all of us.


1. In fact, the official spending projections incorporate only a portion of the costs of continuing the wars in Iraq and Afghanistan. 2. These estimates are in 2008 dollars and are based on the budget authority provided for Head Start and elementary and secondary education programs adjusted for changes in the Consumer Price Index for Urban Consumers (CPI-U). The CPI-U figures for 2003-2007 are derived from data from the Bureau of Labor Statistics, while the 2008 estimate is based on estimates from the Congressional Budget Office.

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