Common Sense Political Thought

I sure wish that I had written this!

Big economy, small deficits

Right this second, the US economy GDP is running at the rate of about $13,000,000,000,000, and current deficits are small and manageable, though you’d never know it from reading the government’s own press releases or articles in the MSM. We wrote about this previously when long-forecast reductions in the deficit came somehow as a surprise to the NYT. But the NYT is not alone in spreading surprise, consternation and economic illiteracy. You certainly can’t figure out what’s going on from the AP’s economic reporting either:

The federal deficit this year will be less than previously forecast but will total $1.76 trillion over the next decade, and could be double that estimate if President Bush’s tax cuts are made permanent, the Congressional Budget Office said Thursday. The $260 billion deficit forecast for the current budget year, which ends Sept. 30, is $112 billion below the office’s last estimate, in March….But the CBO forecast the improvement as short-lived, projecting the gap between revenues and spending will rise to $286 billion in 2007 and total $1.76 trillion over the next decade.

We suppose that the $1.76 trillion estimate deficit over the next decade is supposed to be scary — but how scary is it compared to the GDP total of $140 trillion or so that it relates to. Or, to take another example via Will Franklin and Tigerhawk, defense spending is currently a tiny percentage of GDP:

Will Franklin also helpfully points out that major entitlement spending, currently around 9% of GDP, is expected to continue to rise sharply in coming years. And that is perhaps a useful item with which to conclude our summary: the US economy is astonishingly, unimaginably large, about $13 trillion (6-7x that of China for example). The US budget deficit is smallish, around $260 billion (or around 2% of GDP). And, stories to the contrary, expenditures on the military are miniscule by historical standards, at 4% or so of GDP. What the US needs to guard against and control over the next period of time are runaway entitlements. Otherwise, things are pretty good, and certainly outstanding by comparison with history. (HT: Larwyn)

Hat tip to Bruce Kesler of The Democracy Project!

That defense spending is such a small part of the federal budget is both a problem (defense being the first duty of the federal government) and an indicator that fleeing from Iraq isn’t something that balances the budget at sustainable tax levels. Federal entitlement spending has quadrupled as a percent of GDP in the last four decades, while defense spending has been slashed. The chart below demonstrates that defense spending vs. entitlements have had reversed trends. The trouble is that while defense cannot realistically go much lower, there is no reason in the world to think that entitlement spending won’t continue to climb.

And, of course, there is every reason to think that it will. Medicare spending is expected to increase a whopping 15% this year, to $300 billion, with half of that due to the ridiculous prescription drug benefit that was recklessly added by President Bush and the congressional Republicans. About the only good thing that can be said is that it would have been worse if the Democrats had had their way. Add to that the increasing number of baby-boomers who are hitting retirement age, and Social Security and Medicare spending willstart to take more and more of government spending, simply because the percentage of retired people among the population will increase.

Federal revenues are about 17.5% of GDP, just slightly below the recent historic trend line of 18%. But federal government spending is around 20% of GDP, and that means we simply spend too much.

If we could magically zero out defense spending, not put another farthing into it, the budget would be in surplus; that would be 4% of GDP out, with only a 2½% of GDP gap in revenue and spending. Unfortunately, the trend lines are such that entitlement spending would soon eat up that 1½% of GDP surplus. (And, of course, such ignores the tax return on defense spending which would be lost, but the analysis gets way too complicated for a blog article.)

Obviously, we won’t just zero out defense spending. Once we’re done with the Iraq War, assuming that the lower-level war against Islamic fascism doesn’t jump (or that the Democrats haven’t gotten in power, and just surrendered), defense spending as a percent of GDP will decrease somewhat, though almost certainly not to the levels that would balance the budget at current taxation rates. Even with that, rising entitlement spending will drive the deficit higher, not lower, if that spending isn’t checked.

Thus far, there is no indication, none at all, that spending will be checked. Federal spending has risen dramatically with Republicans in charge, in control of both Congress and the White House. And although our Democratic friends are trying to claim the title of being the party of fiscal responsibility, surely no one has any illusions that the Democrats, when they regain power (as must happen eventually), will reduce the rate of increase in federal spending.

Taxes? Yeah, the Democrats will certainly raise taxes, although I’d guess they won’t be quite as honest about their plans as they should be. And that would reduce the deficit, temporarily. But over the long haul, they’d have to keep increasing and increasing and increasing taxes, because spending, driven by entitlements, will continue to rise. That is what has to be addressed, and addressed soon.