U.S. consumers, businesses and government must address entitlement programs.
Americans need to stop living beyond their means, both in government and their personal lives. For decades, we have spent and consumed much more than we produced, borrowing the difference from abroad.
In 2010, our negative trade balance of payments exceeded $8 trillion while our total federal debt outstanding was almost $9.5 trillion — or 65% of gross domestic product (GDP). The Federal Reserve estimates that the total debt of American companies, households and governments combined has surpassed $52.5 trillion.
The biggest threat to our economic future lies in the three major entitlement programs of Social Security, Medicare and Medicaid, all of which will expand to claim more federal dollars as our population ages. These three funds and other mandatory spending consumed 10% of GDP in 2010. That is expected to rise to 12% in 2021 and approach 16% in 2036.
If federal outlays rise as forecast by the Congressional Budget, those major entitlements will increase from about 4% of federal spending in 2010 to 49% in 2021, forcing all other government activities to cut back sharply.
There has been much talk about the nation's deficits and debt recently, but a major obstacle to coping with future entitlements is that most Americans cherish them and other federal benefits.
Old habits die hard
In recent Gallup and Pew polls, 60% of voters indicated that maintaining entitlement programs at current levels was more important than reducing federal deficits. And many U.S. households and businesses receiving tax subsidies and other government benefits strongly resist having them reduced — even in order to lower deficits.
The Business Roundtable favors cutting business tax rates, but recommends greatly expanding federal spending that aids its members. Meanwhile, American farmers want to continue receiving subsidies and protective tariffs.
Motorists want low gas prices, so they oppose increasing gas taxes. But that tax is too low to maintain the nation's roads and bridges. Unionized government employees want to keep receiving higher benefits than their private-sector counterparts, although many states can't keep funding such benefits.
TheAssociation of Realtors (NAR) is lobbying to retain the mortgage interest deduction for homeowners with one or two homes. In 2008, the mortgage interest deduction cost the federal government more than $88 billion.
In 2009, more than 82% of that subsidy went to homeowners in the top 20th percentile of taxpayers whose average income was $168,000 and whose average mortgage interest deduction was $2,357. Only 0.06% of the deduction went to homeowners in the lowest-earning 20%, where the average mortgage interest deduction benefit was $2.
In 2008, homeowners retained $30 billion from the exclusion of capital gains on home sales, and $29.5 billion from the exclusion of local and state property taxes. So, the total tax benefit to mostly wealthy homeowners in 2008 was collectively $147.5 billion.
Because more than 60% of U.S. households own homes, it is politically impossible to end the mortgage interest deduction. But the NAR even opposes shifting the deduction to a tax credit, which would provide the same benefit per dollar of mortgage interest paid, regardless of the owner's tax bracket.
The desire to keep benefits unchanged affects both political parties. Democrats are reluctant to cut entitlements. Republicans refuse to raise taxes, but most economists say revenue increases are crucial. Apparently most Americans won't accept reductions in government programs that benefit them.
A call for shared sacrifice
In the past, millions of Americans have made sacrifices when challenged. Some examples are 1776, the Civil War, the Civil Rights movement, and 9/11. To avoid a worsening economic crisis, more of us must be willing to accept some austerity. Unfortunately, few of our elected officials grasp the necessity.
Our leaders need to persuade many Americans that they can't keep living on money borrowed from abroad or taxes paid by others. The millions who remain unemployed, or are fighting overseas, are already making sacrifices. The rest of us should be willing to make sacrifices to prevent our economic situation from getting worse.
Tony Downs is a senior fellow at the Brookings Institution in Washington, D.C. Contact him at firstname.lastname@example.org.