Entitlement Spending Cuts

The big issue for 2011 is the future of entitlement spending. Much political spin attributes rich country fiscal woes to temporary factors like the Great Recession, bank failures, and real estate busts, with the implication that temporary fixes—bailouts—can address the problem.

The reality is that government health and retirement programs are on paths that will slowly but inexorably bankrupt all these economies. It is not too late to solve the problem—by slashing entitlements—but every passing year makes the situation worse.

The question, therefore, is how countries will respond. Debt crises like those in Greece, Ireland and other countries may promote needed adjustments, or they may generate bailouts that simply kick the can down the road.

Similarly, political forces in the United States may force essential austerity measures, or they may produce political and accounting gimmicks that pander to popular opinion but do little to address the real problems.

If the rich countries fail to adopt true, long-term fixes, they face crushing tax increases, higher inflation, or bankruptcy. Only time will tell.

— Jeffrey Miron, Harvard University Economist

Image courtesy Flickr user AMagill.