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The Road to a DOWNGRADE – WSJ.com

July 31, 2011

REVIEW & OUTLOOKJULY 28, 2011

The Road to a Downgrade

A short history of the entitlement state.

Even without a debt default, it looks increasingly possible that the world’s credit rating agencies will soon downgrade U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn’t catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody’s and Standard & Poor’s. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back decades, and so this is a good time to review the policies that brought us to this sad chapter and $14.3 trillion of debt.

With former President Truman at his side, LBJ signs the Medicare bill into law, July 30, 1965.

FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of GDP. That changed in the mid-1960s with LBJ’s Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ launched other welfare programs—public housing, food stamps and many more—that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security’s fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program’s unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

via Review & Outlook: The Road to a Downgrade – WSJ.com.

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2 Comments
  1. July 31, 2011 5:11 PM

    There is no doubt that there has been a variety of programs implemented to help the poor and the elderly. Jumping up and down about the cost of these programs will not solve anything. Congress has the responsibility of determining what the country can afford.

    Both corporations and the wealthy are being allowed a free pass in helping to resolve the tax revenue question. Most likely that will not be enough money to cover the costs. Liberals will have to accept modifications in the many programs.

  2. August 1, 2011 6:09 AM

    Agreeing w coastcontact that the Congress must perform its duty: manage the budget and fund the programs passed into law, or to revoke/revise/rework them if funding not feasible.

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