Book reviews for The Journal of Pension Economics and Finance reflect reviewers' own views and in no way represent the views of the institution(s) with which they are affiliated.
It must be rare for a book's relevance to grow exponentially between its original conception and its eventual publication. But such is the case with Andrew Yarrow's concise and compelling review of the causes and implications of federal indebtedness. The book reflects contemporary views of U.S. federal debt as seen through early 2008. As recently as then, budget hawks held up the 2004 deficit – over $400 billion, or 3.6% of GDP – as the epitome of federal profligacy. By 2007, just before this book was written, that deficit had been whittled down to $160 billion, more than fulfilling President Bush's pledge to cut it in half in five years. Yet a vigorous debate still swirled about the Bush tax cuts, the wars in Iraq and Afghanistan, the prescription drug benefit, the oncoming cost explosions in Medicare and Social Security, and the debt that all of this might impose upon our children and grandchildren.
What a difference a year makes! Fast forward to 2009, when a contracting economy by itself pushed the annual federal deficit well past a trillion. Regarding these gargantuan deficits as insufficient, the new U.S. Administration and Congress pushed through a $787 billion “stimulus” package and are debating legislation to further expand federal health care commitments – the fastest-growing area of the budget – by “nearly” a cool trillion over the next decade. From 20% of GDP, where it had remained during most of the Bush Administration, U.S. federal spending has rocketed to 28%. The new architects of federal budgets are now promising that spending will never again slow to Bush-era levels as a percentage of the economy, even under the most optimistic growth projections of the Obama Administration.
In this era of fiscal extremity, many of the slowly-unfolding dangers of which Mr. Yarrow's book warns now seem almost quaint. But even in 2008, however, those dangers were real. To fully perceive where we are now, the reader must multiply the intensity of Yarrow's warnings several-fold. The author offers a scrupulously bipartisan view of the federal debt. He cites the best-regarded deficit hawks on each side of the aisle, including Robert Samuelson, David Walker, Alice Rivlin, Bob Bixby, and Stuart Butler. While his 137 pages cannot accurately be called pleasant reading, he neatly covers the relevant causes, perceptions, and possible resolutions of federal indebtedness. He also writes accessibly about the details of federal budgets. His most compelling chapters, however, are those that explain why deficits do indeed matter and which detail the tragic consequences of doing nothing. Our extravagance in promising benefits to ourselves without paying for them can have no other outcome than to reduce standards of living for our children and grandchildren.
Yarrow states baldly, and rightly, that “this is not what America was about”. He worries that these trends can only produce younger generations who are poorer, more resentful, and less patriotic than their forebears (as indeed we would be, if previous generations had left such an inheritance to us!). He also punctures cherished myths of both left and right, noting frankly that the root of the problem is entitlement spending, though he argues that we must address tax revenues as well as discretionary appropriations. He forthrightly explains the need to close the Social Security shortfall, a welcome antidote to the popular but wholly fallacious urban legend that the program's fiscal woes are exaggerated by its Trustees. Yarrow also calls out Republicans for hiding their own preferred forms of special-interest spending by administering them through the tax code. And the author also notes the inefficiencies that inevitably arise when only 13% of health care costs are paid for out-of-pocket by the purchaser. Federal health care reformers would do well to recognize that health care costs will never truly come under control unless this percentage grows considerably. Yarrow sees both health savings accounts and high deductible plans as important reforms to address this shortcoming of our crazy-quilt health care system.
If anything, the writer is too gentle, since even the most cynical contributors to our fiscal dilemma are not identified by name. On one page the author reproduces an AARP ad professing ostensible concern about federal debt, yet he does not condemn the organization for pursuing lavish additions to that debt while running a PR campaign to buttress its own image. In fact that organization has fought efforts to bring Social Security cost growth under control (including the 1983 reforms of which Yarrow speaks highly) and even now, it advocates that any cost savings from health care reforms be spent by expanding federal commitments still further.
Yarrow's writing is not immune to a few popular but groundless shibboleths. At several points in the text, he cites the U.S. Congressional Budget Office's (CBO) optimistic projections of 2000–02, implying that a coming golden age of surpluses was frittered away by reckless subsequent policies. In reality, between January 2001 and August 2002, CBO had to revise its projection for the 2002 balance from a $313 billion surplus to a $157 billion deficit. Most of this change had nothing to do with federal policy, and everything to do with updated economic data and technical corrections. Simply put, those projected surpluses never existed. In a similar vein, the author also refers to the Gramm-Rudman-Hollings budget law as “toothless and cynical”. Incomplete it may have been, but discretionary spending did decline during its operation, from 10% of GDP in 1986 to 8.7% by 1990. And while many have criticized the fiscal wisdom of passing the prescription drug benefit, Yarrow repeats a false charge that cost estimates were low-balled. Indeed, annual costs for the program came in at less than $50 billion per year during 2006–08, after being projected at over $80 billion per year in the 2005 Trustees' report.
If there is a single key omission that the book makes, it is that it lacks an explanation of the fundamental asymmetry in how the federal government indexes taxes versus spending. In the U.S., the taxpayer's share of Medicare, Social Security, and other entitlement costs is indexed to grow faster than inflation in per-capita terms, yet income tax brackets are indexed to grow only with inflation. For this reason, a progressively larger share of economic output is absorbed in taxation as the economy grows. By 2080, under current law, federal revenues would be 25.9% of GDP, far above historic highs. Accordingly, both spending and taxes would need to be cut at several points in the future, simply to hold the growth of the federal government close to historical norms. This does not necessarily mean that we should never raise taxes. It does, however, suggest that our long-run fiscal problem is not mathematically a problem of inadequate revenues. Failure to recognize this asymmetry can give a mis-impression as to how much of the deficit problem is “caused” by periodic relief from rising tax burdens.
Yarrow does shrewdly recognize the procedural origins of our budget dilemma: much of our problem arises because of the autopilot nature of federal mandatory spending. He offers a few budget process reforms to counteract this problem, but in this writer's view, the only one that would truly do the job would be to do away with the notion of indexed mandatory spending increases. The author also correctly points an accusing finger at gerrymandering as a root political cause of budget paralysis; this political process results in the election of officials who survive through fealty to their respective party orthodoxies, instead of by reaching bipartisan accords. As a result, the worst possible fiscal combination emerges, namely, Republican taxation and Democratic spending. One wonders how much it would help to have a simple constitutional amendment limiting districting irregularities (for example, by setting a national ceiling on the ratio of each Congressional district's perimeter to its surface area).
The debt challenge facing the U.S. is real, and it grows more urgent by the hour. Read Yarrow's book, and afterwards, scan the CBO's latest Long-Term Budget Outlook report. Finally, hug your children and tell them you promise to make your Congressman do better. Then do it.
