19 October 2010

How Confused We Are!

When I was in MBA school in the early '90s our Economics class was divided into teams each of which was to propose a new US federal budget. As my team dug into the existing budget we quickly noticed the rapid growth of mandatory spending would soon outstrip discretionary spending. Therefore, it didn't matter what was done about the budget (which only addresses discretionary spending) if the mandatory spending wasn't brought under control. Our projections had mandatory spending accounting for more than 70% of the federal budget by the year 2004.

Welfare reform delayed things a bit but we're still approaching the point at which mandatory spending will be unsustainable. In fiscal 2009, $2.1 Billion or 61% of the federal budget was mandatory spending including Social Security, Medicare, Medicaid and interest on the national debt.

This isn't really a surprise. A recent USA Today/Gallup poll indicates that three out of four Americans "predict that the costs of entitlement programs will create major economic problems." At first, this seems hopeful. With a majority of people concerned, perhaps there's the political will necessary to make reforms. However, only 44% are in favor of raising taxes and only 34% are in favor of cutting benefits. A mere 12% say both remedies are required. That means that for any proposed solution, a majority of Americans are against it.

How confused we are!

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