The End of Fiscal Politics

Much of American politics today is centered on fiscal policy. The right wishes to shrink the size of the government and rebate many taxes. The left wishes to expand the size of the government and pay for it by raising many taxes. But in the near future, neither one may be possible, says Megan McArdle:

The budget problem isn't in 2041; the budget problem is now. Sometime after next year, the Social Security surplus will shrink, starting to put pressure on the budget. Democrats trying to implement spending plans will start to find their tax increases eaten, not by national health care, but by seniors. By 2011, the problem will be large. By 2017, money will be flowing from the general fund to social security. By 2025, the hole will be about as big as it's going to get. Around about 2015, social progressive plans will be DOA. Republican tax schemes will be DOA. The only thing we will talk about for the following 15 years is where to find the money to pay for Social Security and Medicare.

Elsewhere, and not in response, Bryan Caplan says, while discussing health care reform:

What is odd is that the biggest obstacles to redistribution are the Democrats' favorite programs, Medicare and Social Security. Those programs are going to soak up all of the tax increases the Democrats can dream up, and then some. Having spent the last six years denying that there is a problem, they are going to spend Hillary Clinton's first term watching these non-problems drain tens of billions of dollars from the Treasury, leaving them very little room to maneuver on redistributionary spending.

They are both right, but the bigger problem is surely Medicare, and there is no easy answer. Social Security will work itself out in time, as the Boomers die off and/or the economy expands enough to compensate them. At worst, it's a one-generation problem, and not an especially crippling one. If we must, we can simply raise the eligibility age by a couple of years, and the problem disappears.

Medicare/caid, however, is the bastard gift that keeps on giving. If health care costs continue to inflate at something close to current rates, we will be forced to start rationing care along a steeper health-to-income gradient. In other words, the inequality which already exists in access to care between poor and rich will broaden. Those who can pay for care will get it; those who can't, won't. The only other answer is to ration care by government mandate, perhaps coupled with price controls, and nobody wants that.

This problem isn't unique to America. Japan has had a fiscal crunch for some time now, mostly due to the burden that the elderly there are placing on the rest of society. Much of western Europe has some sort of similar problem. Basically, social democracies are largely susceptible to demographic and economic changes. If the demand for social services increases (due to an aging population, say) or price inflation is high, then the system crumbles on top of itself.

Economic realities may reduce political bickering in the next decade, but surely not for positive reasons. The future will be a test for politicians: play the game honestly, and accept the economic hardships and inflexibility which are coming, or try to cheat the system (by inflating the current, for example, or instituting price controls) and suffer extremely dire consequences.