Posted by Nolan Miller on Jun 9, 2011
Filed Under (U.S. Fiscal Policy)
If you listen to our politicians these days, you hear a lot about the deficit, the debt, the debt ceiling and so on. In other words, much of the talk focuses on the need to bring spending and revenue into balance, and rightly so. And, sooner or later we’re going to do that. We’ll address social security, either through raising taxes or reducing benefits or both, and we’ll do something about health care costs, although I’m not sure anyone has a good idea for exactly how. Maybe we’ll get lucky and grow our way out of this mess while we still have our heads firmly stuck in the sand.
What I want to focus on today is what American government is going to look like when all is said and done, and the very different visions coming out of the Democratic and Republican camps. Although others have talked about this, I think it is a point worth making again. So, here goes.
Consider the following graph, which appeared earlier this year in a Wall Street Journal article by John Taylor. Now, the Taylor article is not exactly flattering to President Obama, and I don’t mean to endorse his main argument here, just to adapt his graph for my own purposes.
What we see here are graphs of government spending as a percentage of GDP under President Obama’s budget through 2021 as well as the House Budget based on Paul Ryan’s Roadmap budget that was passed in April. Note where they end up. The Obama budget heads toward a government that runs around 23 percent of GDP, our best measure of overall economic activity in the country. The House/Ryan plan ends up closer to 20 percent.
In the longer run, these differences become more pronounced. The CBO’s long-run projection for the Ryan plan have government spending decreasing to 17 percent of GDP in 2022 and continuing down to 14 percent of GDP by 2050. (These numbers don’t count interest paid on the national debt.) Projecting out the Obama budget, as far as I can tell, hasn’t been done. However, the same CBO report has long-run budget projections under current law (as of June 2010, so the impact of PPACA (health reform) isn’t in there yet) have spending as a fraction of GDP at 22½ percent in 2022 and increasing to 28% by 2050. Now, the recent Obama budget makes some effort to rein in spending over the medium term, so maybe it puts us on a trajectory toward a government that is, say, 24% of GDP.
All of this assumes that the plans can do something about the rate of growth in health care costs, so take it with a pound of salt. Oh, and keep in mind that this is federal spending and does not include spending on state and local government.
So, there you have it. Sooner or later we’re going to have to start paying for what we’re spending. The question is, do we want to have a government that spends less and provides fewer services, as in the Republican plan, or a government that spends more and provides more services, as in the Democratic plan. Now, a government that spends 14 percent of GDP (not including interest) is smaller than anything we’ve had in the last 40 years. But, it doesn’t seem crazy. A government that spends 24% of GDP is at the top end of what we’ve seen, but again, not a radical outlier. And yet, a 10 percentage point difference in what our government spends is something like $1.5 trillion. So, these will be two very different worlds.
If whether you are a Republican or a Democrat or neither, the battles that are being fought over debt ceilings and entitlement reform are skirmishes in a war over the future direction of American government, and these are very different directions.