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Thursday March 10th 2011
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America's budget
The elephant in the room
Mar 7th 2011, 16:30 by The Economist online
America's fiscal problem cannot be solved unless entitlements are tackled
THE Republicans want to cut "wasteful" spending; Barack Obama has proposed a spending freeze on discretionary items such as education and national parks. But the big items are the entitlement programmes—Social Security, Medicare and Medicaid—that are set to take up an ever larger part of the American budget. The chart shows the proportion of GDP spent on entitlements and interest, compared with the proportion of GDP that the government is expected to raise in the form of revenues. It originally appeared in USA Inc, an analysis of America's fiscal situation compiled by Mary Meeker for KPCB, a venture capital firm (best known as Kleiner Perkins). The data come from the Congressional Budget Office's "alternative fiscal scenario", which is based on today's underlying fiscal policy but also incorporates some widely expected changes, such as an increase in the threshold for the alternative minimum tax rate. As can be seen, entitlements and interest will absorb all government spending by 2025. But when the CBO did the same sums a decade ago, says Ms Meeker, the critical point was reached in 2060. In short, the fiscal position is deteriorating rapidly. Where then is the appetite for cutting entitlements or increasing taxes sharply?
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migmigmigmig wrote:
Mar 7th 2011 4:49 GMT
Keep you government hands off my medicare!
Now go fix the debt problem!
(Is it me, or does the average age of the tea-party members seem to imply they're not really worried about actual long term problems?)
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K Wilson wrote:
Mar 7th 2011 4:49 GMT
The word "entitlements" obscures more than it clarifies. It simply means spending based on an eligibility formula that does not have to be voted on with every new budget. It includes Social Security, Medicare (health care for the elderly), and Medicaid (health care for the poor). The reason the forecast is so dire is simple: high and rising US medical costs. Social Security is slightly underfunded, but not by much; that's easy to fix. US per capita medical costs, whether privately or publicly funded, are already double the OECD average. The rate of increase is twice other countries', and has been for thirty years. Medical costs alone are the cause of US's long-term budget problem. Nothing else even comes close.
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migmigmigmig wrote:
Mar 7th 2011 4:54 GMT
Seriously, tho, if your real primary policy goal was to de-fund Planned Parenthood, and any other "evil" institutions you can list -- using the power of the purse to fight your culture war -- wouldn't it be far easier to astroturf it as across the board fiscal rectitude?
Even when, seriously, it isn't?
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hedgefundguy wrote:
Mar 7th 2011 5:26 GMT
But the big items are the entitlement programmes—Social Security, Medicare and Medicaid—that are set to take up an ever larger part of the American budget.
Social Security owns $2.5 Trillion of US bonds.
This is a "forced savings" program, paid for by money taken from employees and employers.
And what is savings but the deferral of today's purchase to tomorrow.
I see no reaseon why the gov't cannot pay back the $2.5 Trillion.
I hope the gov't can pay back the money I lent them for the iBonds I purchased years ago.
How about we set up a "Pay-As-You-Go" (PayGo) plan for Germany, Japan, South Korea, etc for stationing our troops there?
If they don't pay us, we pull them out.
They can raise thier taxes and field a standing army to replace
US troops.
DEFENSE is the elephant in the room.
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Richard D. Quodomine wrote:
Mar 7th 2011 5:27 GMT
If both sides did a bit more today (cut some entitlement, a small tax increase), it would mean averting disaster. politically, however, it's easier to kick the can down the road to the next generation.
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mario26 wrote:
Mar 7th 2011 5:44 GMT
What really worries me is Social Security, precisely because so many people (including the President) keep saying it's not really a problem. I'm not sure how they think it's not worth working on a fix -- is it because the problem is so far away that it is too cheap to fix, such that we need to wait and let it get more expensive, or that it's so far away that the arguments about how to fix it wouldn't have enough anger and resentment built in? It's the same as the Medicare situation, they intend to ignore the problem completely, demagogue any proposed long-term solutions, and wait until the government's hands are almost completely tied before coming to the table.
It's really simple, the sooner you fix it, the smaller and cheaper the changes would be. A government that is not willing to consider making changes to Social Security is one that can't be taken seriously on any other deficit matter. The next President can't come soon enough.
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upwinger wrote:
Mar 7th 2011 5:51 GMT
The biggest "entitlements" in the U.S. federal budget are:
(1) The mortgage tax deduction which is a trillion dollar subsidy of banks and the real este interests, paid for by renters
(2) Tax cuts for the rich which are paid for by middle and low income taxpayers
(3) The U.S. occupation of Afghanistan and Iraq, U.S. bases in Europe and Japan, and the War On Drugs (a price support program for organized crime, and a jobs program) - all of which are paid fo primarily by midle and low income taxpayers.
U.S. Social security for the aged and disabled is literally paid for by taxes on people with incomes less than $106,000 a year, AND who are not cops, firefighters teachers, etc., and pays the least benefits and has the highest age to qualify of any so-called "first world" country.
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Spectacularj1 wrote:
Mar 7th 2011 6:23 GMT
How is social security and medicare an entitlement program. They are self-funded and solvent (for now). Getting a payment from a program that one has paid into their entire working life is not an "entitlement program" it's insurance and that's how it functions.
Since this part of the budget is self funded, the republicans need to stop crying about it. To ensure it stay funded a progressive witholding tax needs to be imposed to fund it, not to mention part D, isn't funded at all. Having one flat rate it ridiculous and inequitable - I shouldn't be paying the into social security at the same rate as Warren Buffet. Furthermore, wealthy retirees should be exempted from social security and medicare.
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Mikaeel6 wrote:
Mar 7th 2011 6:41 GMT
Before the creation of the Federal Reserve System, budget deficits were not a major problem in the U.S. It seems if a certain action instigated a problem, maybe it's time to re evaluate that action. End The Fed
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Rob S wrote:
Mar 7th 2011 6:44 GMT
The Social Security problem will not surface for another 25 years, when the trust fund principle would be completely used up. A modest increase in taxes or changes in benefits can push that out much further.
The Medicare problem is a much more serious one. Coverage continues to be expanded and costs coincidently(?) go up. Today the government spends over 50% of the total medical costs in the US. It is not a coincidence that, as more government and private insurance money is made available to the medical industry, they find ways (all justified)to spend more money. The dilemma we face is much like the one we see in higher education. There, too, increased government subsidies of tuition coincide with higher tuition costs.
I, frankly, do not know the solution to this problem, except enforced rationing of medical care. Implementation of tort reform, which would significantly reduce defensive use of expensive diagnostic procedures, might help. Another reform might be to move toward a "major medical" approach to insurance, exposing the patient and the doctor to the real cost of routine medical treatment, which might also impede inflation of fees.
upwinger expounds the "Michael Moore" theory of economics - every asset belongs to the government and anything you are allowed to keep is a subsidy. Mortgage payments are not deductible, upwinger. Interest on mortgage payments are considered an expense of doing business and, as such, are deducted to determine net taxable profit.
Obama has highlighted the fact that homeowners also can deduct their mortgage interest, and characterizes this deduction as another subsidy of the rich. However, home owners, too, are making a business investment in their home, and will pay capital gains on any profit they make on the eventual sale of their home. Why is not the interest they pay a business expense? Perhaps the exceptions given to that capital gains tax is a more appropriate target.
Middle income workers pay only a small fraction of the income taxes, upwinger, while low income workers pay almost none. Compare us to "progressive" Europe, where most of the taxes collected are through a regressive 20+% sales tax. You want to raise more money through taxation? That's where the money is.
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06jkeidel wrote:
Mar 7th 2011 6:52 GMT
Thanking God I set up a Roth IRA when I was 15. Seems like Social Security and Medicare simply won't be around in 30 years when I need them...
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Feras. wrote:
Mar 7th 2011 6:57 GMT
@ migmigmigmig
The 'average' tea-party member has absolutely zero appreciation of the graveness of the US's currency fiscal situation, let alone an understanding of even the most basic economic theories.
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martin horn wrote:
Mar 7th 2011 7:08 GMT
This is a situation that calls for one solution. TAX CUTS.
Tax cutting always leads to balanced budgets. Just check out the surprlus-filled budgets of Reagan and Bush Jr. and the first few years of the Obama Administration, which has passed multiple rounds of tax cuts in the stimulus packages (the first in 2009, the second at the end of last year with Republican support because it kept taxes on those earning $250,000 and above from rising).
I mean, raising taxes NEVER increases revenue, so cutting taxes to a 1% rate and cutting funding for the National Endowment of the Arts, Planned Parenthood, and PBS should cure those budget woes in a jiffy.
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johnhaverysamuel wrote:
Mar 7th 2011 7:08 GMT
Mary Meeker treats the US as a company. Ok, the remuneration committee should hammering the leadership of the business, say the top 10% of earners, for taking money out of a dissolute enterprise. It's be like bankers giving themselves bonuses out of taxpayer subsidies, something that'll never happen... Oh. http://www.guardian.co.uk/commentisfree/cifamerica/2011/mar/01/us-taxati...
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jouris wrote:
Mar 7th 2011 7:11 GMT
Social Security and Medicare were sold, when they were enacted, as Ponzi schemes. (Albeit without the label.) That is, they were taking money from one set of people to make payments to other people, on the promise that the first set would get the same treatment down the road. But it's a fiscal approach that only works if the population you are taking money from stays not only larger than the population you are giving money to, but a constant multiple larger. Which it hasn't.
Now you can argue about exactly when the house of cards collapses. But that fact that it will collapse is inescapable -- unless you simply ignore demographics and the numbers. Similarly, the concept that staving off collapse (if only for a while) will be more painful the longer it is delayed is not really difficult. (Of course, I suppose that if you are getting the benefit now, you can figure that a long enough delay will mean that you'll dead and won't feel the pain personally.)
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martin horn wrote:
Mar 7th 2011 7:12 GMT
On a more serious note: The social security situation isn't too bad. Under an optimistic scenario (assuming people start delaying their retirement), social security is actually well-funded. Under a less optimistic scenario, the budget gap is worrisome, but curable through a mix of increasing the retirement age by a few years, indexing benefits to inflation rather than wages, and means testing benefits (bigger cuts in benefits for the well-off). That last solution isn't completely fair (social security is supposed to be a retirement plan, not a means of transfer payments) but it's the only one politically feasible.
Medicare is the disaster waiting to happen. An unwillingness to enforce price discipline via cost effectiveness research and rationing (the likely Democratic solution), coupled with an unwillingness to reform the program to a voucher based system (The solution of Republican Rep. Paul Ryan), will in the end lead to a system in which nobody is in charge of cost cutting and everyone pays higher taxes to treat the eldest citizens in our country.
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Lion Heart wrote:
Mar 7th 2011 7:12 GMT
July 1977 the US department of energy was created in order to make America independent from oil as energy source , today 34 years later we not only depend more from foreign oil(instead of 30% back on those days up to today with almost 70%) but we have a department with 16000 employees and a budget in the range of the 24 billion dollars a year with an extraordinary poor result in its original objective , this is the type of bureaucracy that we need to cut but we also don't want to give them automobile and the health industry. to the hands of these irresponsible and incapable politicians concern about anything but their own political positions , do we have to make cuts? or deepen our economical measurements to make bigger cuts on high political spheres
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Ohio wrote:
Mar 7th 2011 7:15 GMT
It's amazing to me to see this data presented, yet ignored by almost all of the commenters. First, defence is not included in the spending graph. So if you zero out defence, the graph doesn't change. We're still deep in the whole. If it's an elephant in the room, then it's a baby elephant next to Medicare and Medicaid.
Social Security is in theory quite healthy, but in practice excess Social Security taxes have reduced our outstanding debt by $2.5 trillion dollars over the past three decades. If we have to actually pay back what we owe the trust fund, taxes will have to rise substantially, or Medicaid will have to stop paying for retirement homes for the poor, or something else drastic. So Social Security would be in pretty good shape if we could afford to pay it what we owe it, but we can't, because of health care.
Medicare and Medicaid are the only problems that really count. Either the US comes up with a way to reduce the growth in costs, or we start defaulting on debt. As the saying goes, if something can't continue forever, then it won't. We will stop the growth of Medicare and Medicaid, because we must. I suspect that the federal government will, in a burst of federalism, make both programs into a block grant, hand them off to the states, then limit the growth of the block grant. The states, forced to balance their budgets, will make the painful cuts that the federal government won't. There are, in fact, lots of ways to cut medical spending. They all are painful to someone. But this has to happen, so I believe it will.
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Wayne Bernard wrote:
Mar 7th 2011 7:21 GMT
Any signs of a U.S. (and, by extension, world) recovery could be thrown off track in the next two to three months as Congress wrangles over raising the country's debt limit. In 1995 - 1996, a partisan Congress under Newt Gingerich refused to raise the debt ceiling which resulted in a shutdown of government and a massive impact on the United States economy.

Here is an examination of the issue showing just how frequently the debt ceiling has been raised in the past decade and how the entire situation has reached the point of absurdity under both Republicans and Democrats:

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RuariJM wrote:
Mar 7th 2011 7:34 GMT
Ermm...isn't the real elephant in the room the failure to effectively tax the USA's largest corporations? The ones who have the clout to employ office blocks-ful of accountants and lawyers, or to shift their HQs overseas, like Halliburton recently did?
Oh, and the subsidies given to oil, gas and coal businesses - would not cutting those things cut expenditure massively? If they were properly taxed at the same time, well, the country would be in clover!
One other thing that tends to leap out at me from this graph - and I am sure I will be corrected if I have missed or misinterpreted something. The asumption is that revenues will remain at 20% of GDP but expenditures will more than triple. Is everyone going to get poor and sick but never die?
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