Once we’re past the current crisis, the biggest economic problem facing our country, I believe, is the aging of society. Specifically, we need to figure out how to pay the Medicare and Social Security benefits that have been promised to our nation’s seniors when the giant baby boom generation retires.
Although benefit formulas and eligibility for Social Security and Medicare will have to be adjusted going forward, it is unrealistic to think that spending for these programs can be reduced meaningfully, except over a very long period. First, people need decades to adjust and plan for something like an increase in the normal age of retirement, which I believe is the best way to reduce program costs in the long run. Second, the political power of the older generation ensures that no president or Congress will dare to do more than tinker around the edges of our biggest entitlement programs.
But that leaves a huge financing gap that will create federal budget deficits year after year that are far too large to be tolerated. Economic conditions similar to those of the 1970s would become inevitable. These include a collapsing dollar on foreign exchange markets, which would sharply increase the cost of everything our nation imports; massive inflation; and double-digit interest rates.
Older people would suffer disproportionately if these conditions develop. Those on fixed incomes suffer especially from inflation, a lower dollar tends to weaken the stock market, and higher interest rates lead bond prices to fall. And any sort of fiscal crisis necessarily endangers all government benefits if there is irresistible pressure for belt-tightening.
In my new book, The New American Economy, I argue that the only way out of this dismal scenario is to increase the federal government’s revenue-raising capacity. Cutting taxes is simply no longer the way to deal with our nation’s economic problems.
Of course, no one likes paying higher taxes. But there are better and worse ways of raising them. If we put in place now a plan to raise revenues, in the future it will be easier to find ways of doing so that are fairer and less economically detrimental than those that will undoubtedly be the case if taxes are raised in the midst of a fiscal crisis.
I believe we are past the point where we can keep increasing the national debt and push our fiscal problems off onto the next generation. Reducing the debt will require sacrifices from everyone. Ignoring the problem and hoping it will go away will not suffice—the real economic consequences guarantee that something will be done. The question is what.
The bottom line, simply, is we have to bite the bullet on taxes. Those who disagree should at least be aware of the arguments and analysis underlying my conclusion because we are going to have a national debate on the subject in the very near future whether we like it or not.
Bruce Bartlett served on President Reagan’s White House staff and as a Treasury Department economist for President George H.W. Bush.