Cut, cap and (you-do-the-) balancing

Posted by Nolan Miller on Jul 21, 2011

Filed Under (U.S. Fiscal Policy)

I was inspired by this feature on the Washington Post’s web site, which invites readers to try decide, in the event that the U.S. does not successfully raise the debt ceiling by August 2, which payments we should make and which we shouldn’t.

As I wrote last week, much of the discussion surrounding whether or not to raise the debt ceiling has focused on “shrinking government,” with Democrats favoring the federal government spending upwards of 24% of GDP each year and Republicans favoring spending less than 18%, with some favoring spending as little as 14%.  This week, Republicans in the House have even gone so far as to propose a Balanced Budget Amendment for the U.S. Constitution that would cap spending at 18% of GDP.

To see what that would be like, I’ve prepared this spreadsheet, with numbers taken from the Congressional Budget Office’s most recent budget analysis.  The numbers I have here are pretty close to adding up with what’s in the CBO analysis.  So, here’s the game:

1. Do your homework.  You can read about the spending categories in the CBO’s report and learn about topics like the difference between mandatory and discretionary spending (hint: not all mandatory spending is mandatory and not all discretionary spending is discretionary!).   Chapter 3 focuses on spending.

2.  Download the spreadsheet here.

3.  Make American Government work!  The yellow boxes are yours to play with, while the green boxes are numbers calculated to help you.  Start by choosing the percent of GDP that you think we should be spending (E5).  Once you do this, J15 – J17 will show how much money you have available to spend, how much you’ve spent so far, and how much is remaining to spend.  Then, in column F, choose how much we should spend on each of the categories listed.  I’ve started you out by filling in numbers for programs such as Social Security, Medicare, Medicaid and Defense spending in order to illustrate that it will be pretty hard to make the numbers work if you want to reduce spending to 18 percent of GDP and do not cut these programs. But, you’re in charge.  Do what you want.

Now, here are a few things to keep in mind.  First, this ignores the tax side of things.  The taxes that must be imposed in order to support a BALANCED-BUDGET government that is 24 percent of GDP are much more costly than those that must be imposed to support one that is 14 percent of GDP.  So, keep in mind as you cut that every dollar you cut means a dollar more (actually more than a dollar, since raising money through taxes is costly and distorts the economy in other ways) in somebody’s pocket.  Second, this ignores the feedback between the size of government and productivity.  So, if a smaller government leads to lower interest and tax rates, this might lead to higher growth, and if the base GDP number gets bigger it makes it easier to solve the spending problem.  Third, this is a static picture, but based on current projections the problem is supposed to get worse over time.  For example, CBO projects that total spending will rise to 27.6 – 35.2 percent of GDP by 2035 under its best-guess extension of current law (p. 7).  So, if you think the problem is difficult to solve today, just wait and try and do it in 25 years.