Growing Entitlement Spending and ‘Economic Collapse’

January 18, 2007

Federal Reserve Chairman Ben Bernanke today issued yet another warning of U.S. fiscal crisis on the horizon if growing entitlement spending is left unreformed. From the Washington Post:

Federal Reserve Chairman Ben S. Bernanke warned today of a “fiscal crisis” in coming years if the government does not act soon to curb federal retirement and health care entitlement programs, picking up a theme that his predecessor, Alan Greenspan, had pursued without success at the end of his term as head of the central bank.

In prepared remarks delivered this morning to the Senate Budget Committee, Bernanke said that a dip this year in the annual federal budget deficit to $248 billion was “the calm before the storm,” with ballooning entitlement payments looming over the next 20 years as the Baby Boomers retire and medical costs skyrocket.

By 2030, he said, spending under current law on Social Security, Medicare and Medicaid could consume as much as 15 percent of the nation’s economic output, double the current rate. Underwriting that could lead to a “vicious cycle,” he said, as the nation borrows more to meet its obligations and spends increasing amounts to service that debt, leaving less for investors and consumers and slowing economic growth.

“If early and meaningful action is not taken, the U.S. economy could be seriously weakened with future generations bearing much of the cost”… (Full piece here.)

While dire warnings like these may seem alarmist, few people realize how conventional these frightening scenarios of the long-term budget picture have become in Washington policy circles. A famous example comes from the otherwise-staid Congressional Budget Office, who uses colorful language such as economic “collapse” to describe the possible impact of growing entitlement spending on the U.S. economy:

Taken to the extreme, such a path [of borrowing to cover growing entitlement spending] could result in an economic crisis. Foreign investors could reduce their purchases of U.S. securities, the exchange value of the dollar could plunge, interest rates could climb, consumer prices could shoot up, or the economy could contract sharply. Amid the anticipation of declining profits and rising inflation and interest rates, stock markets could collapse and consumers might sharply reduce their consumption. Moreover, economic problems in the United States could spill over to the rest of the world and seriously weaken the economies of U.S. trading partners.

The full CBO report is tax policy gold, in a uniquely depressing sense. Read the full thing here.


Related Articles