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Morning Jay: How to Understand the Debt Ceiling Battle

6:00 AM, Jul 15, 2011 • By JAY COST
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As if all this were not enough, there is the added problem of runaway entitlement spending. Short-term political calculations regularly create incentives for politicians to increase entitlement benefits during good times. And so, nearly every president since FDR has promoted some new, expansive social welfare agenda. That goes for Democrats (Fair Deal, New Frontier, Great Society) and Republicans (Nixon’s Family Assistance Plan and George W. Bush’s prescription drug benefit program). The same calculations – maximize the benefits today while minimizing the costs – have also led politicians to underfund these programs systematically.

The result is a federal welfare state that has grown much faster than the private economy in the last 50 years. The following chart makes that clear by comparing real private sector GDP to real government transfer payments. Both numbers are on a per capita basis and are indexed so that 1960 equals 1.

Thus, our deficit battle today is not simply about getting taxes and discretionary spending to sync up once again. It’s about dealing, for once and all, with the irresponsibility of the last fifty years, when time and again politicians in both parties have piled new obligations on to an unsustainable welfare state, leaving the bills to come due long after they have gone to meet their maker.

Just how bad will this conflict get? It all depends on how well the economy does. If we suddenly generate economic growth like we enjoyed in the 1960s or late 1990s, our deficit problem will ease. If, on the other hand, growth remains stagnant, then the debt ceiling battle will turn out to be merely one in a prolonged series of bloody conflicts over spending and taxation. Given the recent growth forecasts, there are more reasons to be pessimistic than optimistic.

So, what we should see over time is increased partisanship – as the zero-sum policy battles over the deficit reinforce the ideological divide that separates Democrats from Republicans. The GOP has long been the party of the “full dinner pail,” beliving that mass prosperity comes from the promotion of capitalism, meaning a tax structure that facilitates wealth creators. The Democrats have long promoted a redistributionist ideology on behalf of the “humble members of society” -- from Bryan to Wilson, FDR, LBJ, and now Obama. As the deficit forces Washington D.C. either to raise taxes or cut spending, those ideological lines will only grow sharper.

So, unfortunately we all should expect things to get worse before they get better.

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