off the charts
POLICY INSIGHT
BEYOND THE NUMBERS

Federal Spending Should Reflect Cost of Meeting Today’s Responsibilities

Economist John B. Taylor argued in the Wall Street Journal recently that President Obama has dramatically expanded the federal government and that we should return federal spending roughly to pre-recession levels as a share of the economy.  Both parts of this argument are seriously flawed. First, as Paul Krugman explains, the spike in federal spending as a share of gross domestic product (GDP) in the recession doesn’t represent an expansion of government. Its two main causes are a sharp drop in economic growth and a sharp increase in the number of people eligible for programs like unemployment insurance, Medicaid, and SNAP (formerly food stamps), mostly because of rising unemployment.  These factors will recede as the economy and the labor market improve.  For example, the Congressional Budget Office estimates that SNAP spending will fall nearly to pre-recession levels as a share of GDP over the coming decade. Second, at the same time as the economy improves, demographic and economic factors will drive up the cost of meeting longstanding federal commitments:
  • The aging of the population will add to the number of seniors and people with disabilities eligible for Medicare, Medicaid, and Social Security.
  • Health care spending will almost certainly continue to grow faster than GDP as medical breakthroughs improve health and prolong lives but add to costs.
  • Debt held by the public has almost doubled as a share of the economy since 2001, largely due to the wars in Iraq and Afghanistan, the large Bush-era tax cuts, and the severe recession.  As interest rates rise from today’s record-low levels, the cost of interest on the debt will grow substantially.
Thus, contrary to Taylor’s allegation, there has not been a “spending binge.”  Limiting federal spending to its average level over the past four decades of 20.6 percent of GDP, as Senator Bob Corker (R-TN) and others have proposed, might be appropriate if none of these things were happening — but they are. As Matt Miller points out, even under President Reagan, federal spending averaged 22 percent of GDP, and that was a time when no baby boomers were retired and health care costs were more than one-third lower as a share of the economy than they are today.  Our analysis has found that the Corker spending cap would inevitably force enormous cuts in Medicare, Medicaid, and possibly Social Security, and likely in much of the rest of government as well. In short, trying to run tomorrow’s government on yesterday’s revenues ignores the world we live in today.