Amid the clatter of the perpetual budget confrontations between President Obama and congressional Republicans, it’s easy to forget that the United States faces not one but two distinct forms of fiscal imbalance.
The most obvious is the unsustainable long-term gap between federal expenditures and revenues. Less obvious, but equally ominous, is the budget’s accelerating tilt toward the elderly over the young and toward consumption over investment. In the hope of combating the first problem, the looming federal sequester would myopically compound the second.
These twin challenges are not unrelated. Generational fairness demands that Washington stabilize the long-term debt to avoid saddling today’s young people with crushing interest costs. But the way policymakers achieve balance has profound generational implications too—and the sequester would continue a pattern in which the costs of fiscal adjustment are excessively imposed on the young.
The reason is that the sequester, which will fall on March 1 absent an agreement between the president and Congress, directs its across-the-board cuts almost entirely at domestic and defense discretionary spending. That spending includes not only the government’s day-to-day operations (from national parks to aircraft carriers), but also most of its key investments in the productivity of future generations, including education, scientific research, and infrastructure.
By contrast, the sequester completely exempts Social Security and Medicaid, and only slightly nicks Medicare with limited reductions in payments to doctors and hospitals. This comes after Obama and congressional Republicans, in their 2011 deficit-reduction deal, already agreed to tightly cap discretionary spending for the next decade, while sparing entitlements.
These decisions will deepen the budget’s generational imbalance. In 1969, payments to individuals (mostly entitlements) and spending classified as investments in the future (such as education and research) each constituted one-third of the federal budget. Today, payments to individuals have doubled to more than three-fifths of the budget, while investments have plummeted below one-sixth. The Urban Institute calculates that the federal government spends about $7 per senior for each $1 it spends per child.
As American society ages, these trends will only worsen. The Congressional Budget Office has projected that if the 2011 spending caps and the approaching sequester are implemented, the discretionary spending that funds government’s key investments would equal just 2.6 percent of the economy by 2023, easily the lowest level on record. Meanwhile, entitlement spending and interest costs would soar past 17 percent of the economy. Former CBO Director Douglas Holtz-Eakin, president of the conservative American Action Forum, speaks for many Democratic experts, too, when he frets, “We are letting our past crowd out our future.”
Obama carried a commanding three-fifths of young voters in the 2012 election, and polls show them closer to Democrats than Republicans on social and environmental issues and the broad role of government. But in the rolling procession of budget confrontations, neither party has entirely advanced these young people’s interests.
A generationally equitable debt solution would combine entitlement and tax reform with continued public investments in education, research, and other areas that could expand opportunities for future workers. “The trade-offs aren’t necessarily between the parties,” notes Ryan Schoenike, executive director of a group called The Can Kicks Back, which organizes young people around budget issues. “They are between the generations.”
Republicans have offered entitlement changes, but they depart from an equitable formula by opposing further revenue increases (even though the fiscal-cliff agreement eliminated only 18 percent of the tax cuts passed under former President George W. Bush) and resisting federal investments. On paper, Obama comes closer to a past and future balance with his proposal to replace the sequester with a package of revenue increases and entitlement trims; but, in practice, he and other Democrats appear noticeably less receptive to the latter than they were before his reelection. “I remain puzzled why progressives aren’t more adamant about more entitlement reform as a way of both phasing in fiscal austerity and lightening the load [of cuts] on the discretionary budget,” says Peter Orszag, Obama’s first Office of Management and Budget director and now a vice chairman at Citigroup.
The sequester has sprouted from this parallel paralysis. With each party (and its allied interests) resisting big changes in either taxes or entitlements, cutting domestic and defense discretionary spending has become Washington’s path of least resistance, despite its limited value in the deficit struggle. “The sequester … would do little to reduce long-term debt,” says Alice Rivlin, a former CBO and OMB director who cochaired a debt-reduction commission for the Bipartisan Policy Center. “For that, we need entitlement and tax reform.”
That’s also the formula for greater generational equity. The nation faces the risk of sustained political tension between its racially diverse, Democratic-leaning youth population and its predominantly white, Republican-trending senior population—what I’ve called the Brown and the Gray. Although it’s rarely discussed now, both groups share an interest in equipping the young to obtain middle-class jobs that will generate the tax base to support a decent safety net for the old. The sequester, by furthering the federal government’s four-decade shift toward entitlements over investments, breaks that link—and in so doing ultimately threatens the prosperity of old and young alike.
This article appears in the Feb. 23, 2013, edition of National Journal as Failing the Future.