The Deficit Problem

A somewhat-detailed breakdown of the federal budget.  When you look at where federal dollars go, it becomes pretty obvious why it’s so hard to balance the budget.
The largest program is Medicare, with defense and Social Security coming in close seconds.  Combined, these three programs consume more than half of the federal budget.  No political party has shown much interest in cutting defense or welfare entitlements to seniors, so you’d have to cut virtually everything else to eliminate the deficit: no federal transportation, education funding, veterans benefits, etc.  Most of these programs are relatively small, and they’re also pretty efficient—the government gets a lot of value from the dollars spent.  (The obvious exception is education.)
Social Security, and especially Medicare, grow rapidly relative to tax revenue increases.  Some policy experts estimate that Medicare will consume well over half of the budget—by itself—before my generation sees any benefits.  Basically, our budget situation is bleak, and it grows worse over time.
The political obstacles intimidate more than the practical problems.  The party of, umm, limited government—the Republican Party—is also the party of the aging white person.  The party’s only solid constituency thus depends on the Medicare and Social Security Benefits that are the biggest roadblocks to any kind of real fiscal sanity.  The Democrats are similarly hopeless.  Case in point: the largest entitlement expansion since the Johnson administration.  (See my post over the summer at FrumForum.com for why I think the health “reform” package is an utter disaster from a cost-cutting perspective.)  Democrats seem to think that rolling back the Bush tax cuts will do a lot to fix our fiscal situation, but even with marginal tax rates of 100 percent on the richest Americans, we would still have a budget deficit.  That kind of a tax policy would also be a disaster from a growth perspective.  I tend to put Democrats who whine about the budgetary effects of tax cuts in the same category as Republicans who whine about international aid for the same reasons.  Though it does make a lot of sense to reform the tax code so that it collects more revenues without depressing economic growth. 
I actually don’t think we’re totally screwed.  Hopefully Bernanke’s new round of QE at the Federal Reserve does some good, and if the Republican House can help (and control) the president, we may get some confidence-inducing government over the next couple of years.  Regardless, market economies tend to recover.  A stable growth rate and further reforms to the health care system will fix the budgetary mess over time, so long as politicians can resist the urge to pile on.  Given our political climate’s new emphasis on the deficit, there’s a pretty good chance that will happen.
That said, I’m still crossing my fingers for a Mitch Daniels run in 2012.