Fifteen years ago, the US was in the midst of what you could call its "Age of Diminished Expectations." Productivity gains had stalled, energy prices were high, the backlog of potential technologies that originated in the Great Depression had been exhausted, and waning benefits from economies of scale led nearly every economist to project that economic growth would be slower in the future than it had been in the past.
With productivity growth stagnating for almost two decades, it made sense back then to argue that the US government's social-insurance commitments (Social Security, Medicare, and Medicaid) were excessive and so had to be scaled back.
That was then, this is now. The intervening years have seen an explosion of technological innovation that has carried America's general productivity growth back up to its pre-slowdown levels. Indeed, today the US economy is standing on the brink of biotechnological and, perhaps, nanotechnological revolutions of vast scale and scope. Yet the same calls to scale back America's social commitments are heard.
Social Security's actuaries may not have fully recognized the impact of today's technological revolutions, but they have markedly boosted the scale of the system that the US government can afford. Fifteen years ago, the consensus was that America's Social Security system was in huge trouble, that it needed the equivalent of an engine rebuild. Today its problems look, as the Brookings Institution economist Peter Orszag says, much more like the equivalent of a slow tire leak: you have to fix it eventually, but it isn't very hard to do and repairing it isn't terribly urgent.
So why is the Bush administration spending time and energy proposing radical changes to the Social Security system as its signature domestic policy initiative -- indeed, as virtually its only policy initiative? Everyone who worries about America's weak fiscal position puts Social Security's relatively small funding imbalance far down the list of priorities. The highest priority problem is the overall budget's medium-run outlook, as the Bush tax cuts have opened Reagan-size deficits that threaten to cripple US economic growth.
The second highest priority problem is figuring out what to do in the long term with Medicare and Medicaid. America must decide the size of its public health programs and how to finance them. In reality, this is more of an opportunity than a problem: if we did not expect that doctors and nurses will be able to do marvelous things in a generation or two that they cannot do now, we would not be projecting serious fiscal deficits arising from the health programs.
The third most serious problem is to put the US government's General Fund budget on a sustainable basis, so that the non-Social Security government can finance itself and meet its commitments after the date -- around 2020 -- when it can no longer borrow from the Social Security Trust Fund.
The bottom line is that Social Security's long-term funding difficulty, while real, is projected to be much smaller and much further in the future than any of the nearer, larger, and more significant fiscal problems currently facing the US government. If Social Security is a slow tire leak, then the post-2020 General Fund is an urgent brake job, Medicare and Medicaid are a melted transmission, and the budget deficit is the equivalent of having just crashed into a tree.