Long-Term Fiscal Realities by Alan

¶ … Long-Term Fiscal Realities" by Alan D. Viard addresses the probable financial future of the United States as a result of increased growth in Social Security, Medicare and Medicaid spending. According to the author, the four realities will entail: 1) the rise of federal revenue above its current share of GDP; 2) the reduction of entitlement spending relative to current policies; 3) an increased burden on the middle class to address the fiscal imbalance; and 4) the likelihood of consumption taxation as an increasing part of the federal taxation system.

According to the author's projections, Social Security, Medicare and Medicaid will rise from 8.5% of GDP, as estimated in 2007, to 14.5% in 2030, and 25.7% in 2082. In addition, only a modest rise is projected in federal revenue under current policies, from its 18.8% level in 2007 to only 20.9% in 2082. The imbalance created by this needs to be addressed if the future generations of the country are not to be faced with a severe reduction in their wealth levels -- a key implication, as Viard duly notes.

In terms of the first implication then, Viard interestingly notes that the rise of federal revenue above its current share of GDP will be politically rather than financially necessary. This means that public willingness to accept certain fiscal realities, such as a reduction in benefit levels in terms of those promised by current policies, is unlikely.

The second reality -- a reduction in entitlement spending -- means that continually rising health-care costs will need to find increased financing from the private sector as opposed to the public sector as its sole source of income. According to the author, this could imply a dramatic modification of the current health-care system.

In terms of the third reality, the middle class is by far the largest sector of American society, and hence the largest tax burden will be relayed to this income group. In realistic terms, only a limited tax burden can be imposed upon the higher-income group, and very little can be imposed on the lower-income group. In practical terms, the greatest collective burden will have be borne by the largest sector of economic society.

Finally, because the public is unlikely to accept the complete replacement of income taxation by consumption taxation, the most likely solution in the long-term is a partial replacement to mitigate the strain created by the rise in federal revenue.

USE OF EVIDENCE

The author makes substantial use of empirical evidence in the form of published literature and survey data. He for example quotes the Congressional Budget Office (CBO) to substantiate his claims regarding future projections of the fiscal realities in the United States. Survey data collected by Blinder and Krueger (2004) are used to substantiate the assertion that Americans tend to be unwilling to accept benefit cuts as the sole measure to mitigate the long-term Social Security deficit. Instead, the survey suggests that the majority of Americans favor a combination of tax increases and benefit cuts to achieve this end.

Throughout the publication, empirical publications are used to substantiate the author's points. He makes frequent and ample use of published data without letting these override his own conclusions from the works used. Instead, there is a good balance between the use of data and the author's own views regarding the financial future of the United States.

Viard's assertions are therefore soundly substantiated without simply being a repetitive review of already existing literature. Instead, he combines the literature, survey data, and his own views in such a way as to provide a valuable contribution to existing investigation.

CONTRIBUTION

As mentioned, it can be said that the author makes a valuable contribution to the field of finance with this article. At the beginning of his article, Viard notes that some discussion on fiscal imbalance emphasize the impact on interest rates, while others focus on the potential consequences should policymakers not address the fiscal imbalance in due time. Such consequences could include the unwillingness of foreign lenders to buy additional Treasury securities or the default of the government's debt.

Viard's contribution on the other hand focuses upon the future under the assumption that there probably would be mitigation measures in place to handle the fiscal realities in the United States. Instead of the relatively short-term concern of interest rates and the relatively unlikely eventuality of debt defaults, Viard's contribution is a more realistic long-term vision of the future, and the likely solutions that might provide for the financial survival of American society.