Frank Woolworth was a retail tycoon in the early 20th century. When he passed away in 1919 his granddaughter, Barbara Hutton, inherited so much money that she became one of the richest people in the world.
Sixty years later, when Ms. Hutton died, she is said to have had less than $3,500 in the bank.
What happened? Apparently, Ms. Hutton fell for the temptation to spend and give away money as though she had an endless pile of cash in the bank.
Her case, tragic as it was, is not unique. The same temptation has the United States Congress in a tight grip. The difference is that where Ms. Hutton spent her own money, Congress is spending ours.
More than two thirds of federal spending goes toward entitlement programs, many of which are well known: Social Security, Medicare, Medicaid, SNAP, WIC, TANF… Others are more obscure, and some of them we do not even think of as entitlements (public education is one example). Together, these programs will cost the federal government about $2.6 trillion in 2015.
There are good arguments in favor of entitlement programs, as well as against them. We can debate those arguments until the Mohave Desert freezes over. The more important issue right now is whether or not the federal government is frivolously spending this money, or if they have given these entitlement programs a sustainable funding mechanism.
Surely, if you promise away almost 14 percent of our GDP, and people are supposed to rely on those promises, you must have thought out a safe and secure funding source. Right?
With the exception of Social Security and (if we are generous) Medicare, Congress has no dedicated mechanism to pay for its entitlements. But not even Social Security is intelligently funded: from 1950 to 1990 Congress raised the Social Security tax 20 times just to keep up with outlays. Since then they have tried to reformulate the terms of spending to slow down its growth. It has not worked: depending on whom you listen to the program is going bankrupt soon, very soon or next week.
The cold, hard truth is that 80 cents of every dollar Congress uses to pay for entitlement programs come from one source, and one source only: personal income. Yes, it is true: over the past 35 years, personal income taxes and social insurance fees – which are based on personal income – have accounted for 80 percent of total federal tax revenue.
It is not hard to see what this leads to. Congress will have to keep its fingers crossed and hope that personal income, by the grace of God, will grow at least as fast as entitlement spending every year.
Unfortunately, the grace of God has not been on the side of Congress:
- In the 1950s entitlement spending grew by 14.7 percent per year, on average, while tax revenue grew by only 9.5 percent per year;
- In the 1960s annual entitlement spending increased by 12.5 percent with tax revenue growing at 7.8 percent per year;
- In the 1970s the numbers were, respectively, 16 percent and 10.5 percent.
The 1980s and 1990s were better, but then things got bad. From 2000 to 2010 annual entitlement spending grew seven times faster, on average, than annual tax revenue.
It is quite simple to see the consequences of these numbers. When Congress has spent all federal tax revenue they have gone into debt to be able to keep spending.
Kind of like when Barbara Hutton wanted to continue to spend when she had used all the dividends and interest she earned from her wealth.
It is time for Congress to realize that just because they increase entitlement spending, nothing says that the tax base – essentially personal income – will grow fast enough to produce the needed tax revenue.
But Congress needs to do more than that. They need to start abiding by a budget formula where entitlement spending is capped at what taxpayers can afford. Without it, they will continue down the fiscally reckless path previously traveled by Barbara Hutton. But where Ms. Hutton spent her own fortune, Congress spends our children’s money.
There is only one end point on that path. One day our creditors will lose faith in the federal government – and we have a debt crisis.
Let us avoid that. Let us give the federal budget a new architecture based on common sense and fiscal sustainability.
Sven Larson, Ph.D., is an economist and a Member of the Council of Scholars of Compact for America Educational Foundation. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Also find Sven at America’s Fiscal Future.