fiscal policy

Recent U.S. policy changes and more optimistic fiscal forecasts have significantly improved the long-term fiscal prospects of the country. Nevertheless, these prospects remain dismal. Unless U.S. fiscal policy changes by a lot and very soon, our descendants will face rates of lifetime net taxation that are 70 percent higher than those we now face. They will, on average, find themselves paying 1 of every 2 dollars they earn to a local, state, or federal government in net taxes.

Encumbering our progeny with a fiscal burden of this magnitude, apart from the question of its morality, could well prove economically infeasible. As a host of countries in Latin American and Eastern Europe know all too well, there is a limit to the amount of resources governments can extract from their economies. Once that limit is reached governments find themselves forced to print money to try to pay their bills. Hyperinflation, the gradual disappearance of the formal sector, anemic national saving, meager rates of domestic investment, and economic stagnation are the legacies of trying to take from the private sector more than it’s able or willing to give. itat on

A number of factors, besides current and projected Medicare spending, are responsible for the imbalance in U.S. generational policy. But the ongoing excessive growth of Medicare benefits is certainly a key culprit. Achieving generational balance solely by cutting Medicare benefits is feasible but would require cutting over two-thirds of the program’s expenditures assuming the cuts were made today. If one waits five years before cutting Medicare, four fifths of the program would have to be slashed. Clearly, Medicare cuts of this magnitude are unlikely to happen, but however we resolve our severe crisis in U.S. generational policy, it’s clear that significant reductions in Medicare spending will be a major part of the story.