This article was first published on CEPR.
Apparently the paper is confused on this issue since it headlined a front page piece on the budget, “Trump budget sets up clash over ideology within G.O.P.” The article lays out this case in the fourth paragraph:
“He [Trump] also set up a battle for control of Republican Party ideology with House Speaker Paul D. Ryan, who for years has staked his policy-making reputation on the argument that taming the budget deficit without tax increases would require that Congress change, and cut, the programs that swallow the bulk of the government’s spending — Social Security, Medicare and Medicaid.”
Most of us recognize Donald Trump and Paul Ryan as politicians who hold their jobs as a result of being able to gain the support of important interest groups. It really doesn’t make much difference what their political philosophy is. Contrary to what the NYT might lead us to believe, this is not a battle of political philosophy, it is a battle over money.
On this score, the NYT also gets matters seriously confused. First of all, it is wrong to describe Social Security, Medicare, and Medicaid as “the programs that swallow the bulk of government spending.” Under the law, Social Security can only spend money raised through its designated taxes, either currently or in the past. For this reason, it is not a drain on the rest of the budget unless Congress changes the law.
Medicaid would also not rank among the three largest programs. The government is projected to spend $592 billion this year on the military compared to $401 billion on Medicaid.
The claim that Paul Ryan is concerned that these programs would “swallow the bulk of government spending” directly contradicts everything Paul Ryan has been explicitly advocating for years. Ryan has repeatedly put forward budgets that would reduce the size of the federal government to zero outside of the military, Social Security, Medicare, and Medicaid. (See Table 2 in the Congressional Budget Office’s analysis.) It is difficult to understand how a major newspaper can so completely misrepresent a strongly and repeatedly stated view of one of the country’s most important political figures.
The piece is also somewhat misleading in telling readers:
“Social Security, health care and net interest now comprise nearly 60 percent of all federal spending, and that figure is expected to soar to 82 percent over the next 10 years.”
One of the main causes of this “soaring” is the projection that interest rates will rise sharply over the next decade. There are three points worth noting on this issue. First, CBO has been repeatedly wrong over the last six years in projecting that interest rates will rise. While CBO may turn out right this time, it is certainly worth pointing out its past track record on this issue.
The second point is that the interest rate is a policy choice by the Federal Reserve Board. In effect, CBO is projecting that the Fed will decide to raise interest rates substantially over the next decade. Again, this may prove right, but it is important for readers to realize that the rise in interest payments would be due to a policy decision by an agency of the federal government (the Federal Reserve Board), not some inevitable economic outcome. The Fed would presumably raise interest rates to combat inflation, which has not been a problem for the last decade.
The third point is that, in contrast to much doomsaying in the media, interest payments as a share of GDP are near a historic low. After deducting the money rebated by the Federal Reserve Board ($90 billion a year), interest payments are now roughly 0.8 percent of GDP. This compares to more than 3.0 percent of GDP in the early 1990s. Of course even that debt burden did not prevent the 1990s from being a very prosperous decade.
It is also worth noting that whole focus on deficits and debt is misplaced if the issue is the future commitment of economic resources. Much government action imposes costs on the economy without taxation. An obvious example is when the government privatizes an asset like a road or the airwaves. The holders of these assets will effectively be imposing taxes on the public, but they won’t be described that way.
The most important type of hidden tax in this vein is patent and copyright monopolies. These government-granted monopolies often raise the price of the protected items by several thousand percent above the free market price. The amount of money at stake is enormous. In the case of prescription drugs alone the gap between the monopoly prices and the free market price is close to $360 billion a year, almost 2 percent of GDP.
This is more than twice the size of the interest burden on the national debt. While those who want to cut programs like Social Security and Medicare might want to focus on government debt and deficits, anyone really concerned about the burdens the government was imposing for the future would be putting these monopolies front and center.
The NYT also misrepresents the nature of the conflict over the programs that might be cut as a generational issue:
“In effect, Mr. Trump appears determined to take sides in a generational struggle between older, sicker Americans who depend on the entitlement programs, and their younger, poorer counterparts whose livelihoods are shaped by the domestic programs likely to see steep cuts.”
This generational description is wrong on many counts. First, since generations of families often live together (which is especially true with poorer families) cutting Social Security payments would directly hurt tens of millions of low income children. Medicaid also disproportionately benefits both children and seniors. If this program is protected in the Trump budget then it will help both groups.
Also, as a practical matter, few Republicans advocate large cuts for current beneficiaries of programs like Social Security and Medicare. They generally advocate cuts that will hurt future generations, like the millennials. In effect, they are proposing cuts to these programs that will hit today’s young, but not until they are older. It is difficult to see how this would be siding with the young in a generational battle. (It would be possible to reduce the costs of the health care programs by going after the excessive rents of pharmaceutical industry, the medical equipment industry and doctors, but few politicians, reporters, or economists seem to even want to talk about this possibility.)
Basically, Trump seems to have opted to protect universal programs with broad-based support while targeting programs that can be identified as helping poor people of all age groups. Trump’s actions are easy to explain as a political tactic even if they don’t fit any obvious ideology.