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For the Economy to Grow, Washington Needs to Take on Entitlement Programs

March 15, 2017 5 minute Read by Laura Collins

President Donald Trump's vow to spur economic growth to as high as four percent annually reflects a belief in our capacity to expand our GDP beyond its recent tepid growth of 2 percent or so. This is his most admirable policy position to date.

Unfortunately, the White House's preliminary budget for the Fiscal Year 2018 would make it harder to generate faster growth. The administration still needs to fill in a variety of budget details, but, so far, the problem is the plan does not touch mandatory spending on entitlement programs.

Medicare, Medicaid, Social Security, and other guaranteed annual spending programs are the most significant long-term threat to U.S. fiscal stability. They increasingly drive up the federal debt, which limits our economic potential and hurts our global economic competitiveness.

These federal entitlement programs represent 60% of the federal budget and 12% of GDP. Medicare is projected to exhaust its reserves by 2028. Social Security is projected to be insolvent by 2034. In their current incarnations, these programs are projected to consume three-fourths of the federal budget in a decade. 

This situation is not sustainable, especially since the government must borrow money to make up for the shortcomings. That is one significant reason the federal debt now totals $19.9 trillion and presents a grave challenge to stronger growth. Debt is expensive, and high debt levels have negative effects across many sectors of the economy.

Anyone with a car payment or home mortgage understands that higher interest payments accompany higher debt levels, shifting money away from other potential expenses. The federal debt is the same, but with much higher stakes. 

High interest payments divert spending from programs such as public education, infrastructure, and research and development. A Peterson Foundation analysis of data from the Congressional Budget Office predicts interest costs are on pace to be the largest federal budget category by 2050. That means we will pay more for interest than we do to defend the country, protect the public welfare, and engage in the world.

The private sector is affected as well. As the government’s capital needs increase, the private sector has fewer dollars to access for its own needs. At the same time, interest rates rise. As a result, businesses are unable to afford additional investments in innovation or new property or equipment.

Higher interest rates hurt individual borrowers, too. They impact our personal ability to purchase property or fund education and training for our own needs.

There is certainly a large public ramification to these realities. Investments in education, whether public or private, drive economic opportunity and social mobility. Skilled workers can compete in an increasingly technical and global economy. Innovation keeps our businesses competitive against the rest of the world. 

Entrepreneurs who cannot afford the capital needed to start a business cannot create jobs. These factors, driven by rising federal debt, are a continual drag on our economic growth potential. 

Even the trade deficit is impacted by our unsustainable debt. As the federal budget deficit rises, the trade deficit often rises with it. With private sector capital demands crowded out of the domestic market, foreign capital enters the U.S. capital market to meet the need. The administration has repeatedly pointed to the trade deficit as a problem it will fix, yet this proposed budget ignores a major driver of higher trade deficits.

Many people who depend on Medicare, Social Security, Medicaid and the like will not want to see them changed. But for the long-term fiscal health of our country, we cannot allow entitlements to continue their not-so-slow creep into federal budget dominance. Good policy often requires tough choices. Stronger economic growth cannot be achieved by choosing an easier path.

The President’s goal of stronger economic growth is laudable. But his proposed budget is unlikely get us there without tackling entitlement spending.


Author

Laura Collins
Laura Collins

Laura Collins is the Deputy Director, Economic Growth at the George W. Bush Institute. Laura previously served as the Director of Immigration Policy at the American Action Forum. Laura has experience in politics, working as a Senior Research Analyst at the Republican National Committee for the 2012 election cycle and in the Texas House of Representatives for the 82nd Legislature. A former practicing attorney, Laura earned a JD from The University of Texas School of Law and a BBA from the University of Oklahoma.

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