July 27, 2011
What A Spending Solution Would Look LikeBy Greg Richards
Speaker John Boehner is leading the charge to rescue the country from the uncontrolled spenders. The increases in social spending in the last 50 years have, until recently, been absorbed by reductions in the percentage of the defense component of the budget. Defense spending went from 14% of GDP in 1953 (reflecting both the Korean War and the build-up for the Cold War) to approximately 5% currently. This "freed up" about 9 percentage points of GDP in the budget which was used for growth in social programs.
Thus, until 2008, the budget for the United States remained reasonably under control. This can be seen in Chart I:
Chart I is very important because it shows the level of spending as a percentage of GDP that the country has experienced over the last two generations. There was some unpleasantness in spending in the 1980s but that was ultimately wrestled back down, as a percentage of GDP, by the economic growth spurred by the Reagan policies and the Gingrich/Clinton spending control in the 1990s. Note that even the "high spending" Bush years are not out of line with historical experience, and these numbers include all federal spending encompassing, for instance, the wars in Iraq and Afghanistan.
The dotted line is at 19% of GDP which is widely thought to be the maximum amount of revenues that can be extracted from the economy and still have us be the strongly growing free-enterprise economy that we have traditionally been. Even at the height of World War II, in 1944, tax receipts did not exceed 20% of GDP. Beyond 19%, we get onto the unfavorable part of the Laffer Curve where higher tax rates result in lower tax revenues.
What has happened during the Obama administration? Take a look at Chart II:
Oops! Spending as a percentage of GDP has exploded on President Obama's watch (the vertical orange line is at 2009, the first year of the Obama administration).
The important thing about this spending, running this year, the last point on Chart II, at about 25.4% of GDP, is that the administration has no plans to bring it down by a substantial amount. This is not "crisis spending" but in the mind of the president, just the "new norm."
It is this condition of a new norm of spending unstated and undefended by President Obama and thus not part of the national conversation that Speaker Boehner is battling, virtually alone, in the public forum. The business community has not backed him up; those citizens like Pete Petersen who have chosen the deficit spending issue as their own have not backed him up; senior politicians, who must know this data as well as we do, have not backed him up. One might call the current situation in the public forum "the silence of the lambs."
What this surge in spending represents is the bill for the welfare state coming due. There is no more room for the defense budget as a percentage of GDP to shrink -- recall that it is down from 14% of GDP in 1953 to 5% of GDP currently -- and the baby boomers are starting to retire and claim their benefits.
If we take 19% of GDP as the "norm" for spending, then this year we are spending 6+% of GDP more than we should be for the long-term solvency of the country. With GDP at about $15.1 trillion, 6+% of this is $900+ billion of "overspending" which we can round up to $1 trillion. We are spending $1 trillion more this year than we can afford on a long-term basis and, absent Speaker Boehner's negotiations with the administration and the Dems, there is no movement afoot to reduce this spending!
We are borrowing about $1.6 trillion this fiscal year. If we are overspending by $1 trillion, where does the other $600 billion in borrowing come from? That is due to the fact that tax receipts are depressed by the very weak economy. That, hopefully, will be self-correcting when/if the economy recovers to more normal employment and growth levels. So the president is not wrong to note the shortfall in tax revenues, but that is mostly due to the weak economy, not to tax breaks for millionaires, which, if closed, will do nothing about the fundamental problem of overspending.
And here is the larger point about our overspending: since it is due mostly to the explosion in entitlements, over the long term, "cutting spending" is not going to hack it. We certainly don't want to undermine Speaker Boehner's efforts to get the administration and the Dems to recognize the peril the country is in by requiring spending cuts of the same amount as the debt ceiling increase, but that will not be sufficient over the long term.
We are looking at overspending of at least $1 trillion per year for the foreseeable future as the "new norm" enshrined, for instance, in the administration's budget submitted in February, but now apparently repudiated (I am rounding the numbers off here for simplicity). We as citizens can recognize as an obvious dodge the stratagem now being practiced in Washington of discussing budget cuts in 10-year terms. Where did that come from? And who believes that political decisions reached today will be honored a decade hence? Nobody. But just to orient your thinking, since we are on a track to overspend by $1 trillion a year for the next 10 years, we need to cut $10 trillion from 10-year spending to re-right the ship of state. So, if there is an agreement to cut $2 trillion or so, as has been discussed, that would be a down payment, but it is only 20% of what needs to be cut from projected spending.
Essentially, as the bill for the welfare state has come due, the Dems have given up governing. In 2010, in control of both Congress and the White House, they refused even to pass a budget. And we know why. They don't want the public to see on paper that they are ruining the country. So far this year, and the fiscal years ends in September, the Dem-controlled Senate has refused to pass a budget, even though it has been presented with one by the House. The Dems have no answers.
The country has committed to spend more wealth than it can generate and the Dems do not want to face this fact. So they resort to name-calling. And you will notice, as has been pointed out on AT and elsewhere, the president has never proposed his own solution to the overspending problem. He just sits at the table like a frog on a log croaking at the proposals made to him. What is the president's proposal for the debt ceiling crisis? "Rib-bet."
What might a spending solution look like? Chart III shows a plan that we have suggested previously:
The projected federal expenditure numbers from 2011 to 2018 are a "glide path" to bring federal spending back to sustainable levels. Since we are currently 6.4 percentage points over the sustainable level of 19%, 25.4% for fiscal 2011, the model presented here takes seven years to reduce federal spending back to 19% of GDP. "Reduce" here means as a percent of GDP since the actual numbers do not decrease. It is similar to the downward slope in spending as a percent of GDP during the Clinton administration. The table below shows the basis for the numbers in Chart III:
What the table shows is that over the period of the glide path model, federal spending does grow by about $200 billion, or about $30 billion a year on average, which while small, is not nothing. The table does not show steady growth in federal spending because of the way it is constructed, but the general point is clear.
The glide path model uses the "fiscal dividend" -- the increased amount of spending capacity the country gets each year from growth in the GDP -- to close the gap of $1 trillion that we have now between what spending in 2011 is and what it should be. This gives the government the ability to see what funds it will have to spend and plan accordingly. It implies restructuring of the big entitlement programs -- a first step would be means-testing them -- and also provides a framework for cutting out entire departments which must go so that the federal government can fulfill higher priorities.
The word one has to tune one's ear for in this project is not "cutting costs" but "restructuring." The current path that spending is on -- perpetuating $1-trillion-per-year overspending -- cannot be treated by "cost-cutting." It requires really a change in the philosophy of spending, which the Dems are not willing to contemplate. That is why all they have to offer here is vituperation. They are in favor of America becoming a socialist country, in spite of the failure of socialism everywhere it has been tried, while we are not.
There are several things that we should keep in mind in this war over the future of the country:
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