America’s Grim Budget Outlook

By Fareed Zakaria

A protester holds a flag as demonstrators continue to occupy the state Capitol in protest against proposed budget cuts in Madison, Wisconsin February 27, 2011. Wisconsin’s Republican Governor Scott Walker said on Sunday he would not back down in his confrontation with state public sector unions and repeated his threat to lay off state workers if the standoff continued.                                 REUTERS/Darren Hauck

It is now well understood that one of the crucial drivers of the crises in the Middle East is the discontent of its youth. Arab countries have been unable or unwilling to provide jobs, education, opportunity and rights for their young and so, finally, they revolted. Is there any lesson in this story for the United States? Not directly; there is no analogy between Middle Eastern dictatorships and American democracy.

But if the troubles of Arab youth make us shine a light on the state of America’s youth, the picture that emerges is grim.

As countries get rich, you might assume that they focus greater attention on their children. Not in the United States. The federal government’s expenditures on children have shrunk as a share of the budget over the past 30 years. In 1960, about 20 percent of the federal budget went to programs dedicated to the health, development and education of Americans under the age of 18. Today it’s 10 percent and falling.

By contrast, spending on the elderly has skyrocketed, doubling as a percentage of the budget during that time. Spending on Social Security and Medicare alone makes up close to 40 percent of the budget. In a decade, that share will rise considerably, perhaps to as much as half the federal budget. Whatever the exact percentages are – what you define as programs for children and the elderly can vary – the conclusion is clear: The federal government spends between $4 and $5 on elderly people for every dollar it spends on children.

Why is this happening? To put it bluntly, children don’t vote or make campaign contributions, and the elderly do both aggressively. Our political system is hyper-responsive to votes and money, so the natural consequence is that those who organize, vote and send in dollars are looked after. Maybe we need to let toddlers form PACs.

In fact, the contrast between what we spend on the old and the young is part of a broader problem that threatens America’s economic future.

Look at the economic debate in Washington: We continue to avoid dealing with the large entitlement programs and the largest domestic giveaways, such as the tax deduction for mortgage interest. No tax increases, such as a value-added tax or a gas tax, are even remotely possible. Instead, legislators make a show of cutting the budget by trumpeting the savings in the much smaller pie of discretionary spending, slashing education, infrastructure, science and other such programs.

The net effect is that the United States will continue to massively subsidize consumption and starve investment. This is exactly the opposite of what history tells us produces long-term economic growth.

The American economy is already far too focused on consumption and credit. And not only will this approach have limited benefits to the budget – any fiscal discipline that does not tackle entitlement spending is a charade – but we are cutting in precisely the areas where we should increase spending. From China to South Korea to Germany, countries are making large investments for future growth at the moment we are pruning such expenditures.

Again, the reasons are clear: There is no political will to take on the subsidies and spending that are consumption-related. And yet we need to find budget cuts, so lawmakers look to the easy place to find them: on the investment side of the budget. The result, however, will be disastrous for the country’s long-term health.

President Obama sounded this call for investment in his State of the Union address. His budget tries to preserve and even expand spending in key areas that will contribute to future growth. But he faces a Republican Party that is fixated by a budget-cutting mentality but refuses to propose entitlement cuts and in which a sledgehammer is preferred to a scalpel. And America’s business community is sitting on the sidelines, betting its future on the growth in foreign countries (which themselves are making huge investments for their growth).

America’s growth and prosperity over the past few decades have been consequences of major investments made in the 1950s and 1960s. Some of those are the interstate highway system; a public education system that was the envy of the world; massive funding for science and technology that produced the semi-conductor industry, large-scale computing, the Internet and the global positioning system. When we look back in 20 years, what investments will we point to that created the next generation of growth for the next generation of Americans?

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