Spending Madness

Source: Bureau of Economic Analysis

In a despairing op-ed in the Financial Times, economist Jeffrey Sachs declares that the United States has surrendered to a small government nightmare:

America’s two political parties depend on wealthy contributors to finance their presidential campaigns. These donors want and expect their taxes to stay low. As a result, social divisions, broken infrastructure, laggard educational attainments, high carbon emissions and chronic budget deficits are likely to continue no matter who is elected, even though the public supports higher taxes on corporations and the rich.

Only a big political realignment, perhaps spurred by a third party bold enough to campaign on free social media rather than expensive television advertising, is likely to break the status quo. Until then, the demise of public goods and services will continue apace.

He’s simultaneously right and wrong. Although both campaigns are portraying their differences from their opponents in apocalyptic terms, the difference between freedom and slavery, the reality is somewhat different:

Mr Ryan’s plan calls for federal revenues of 18.4 per cent of gross domestic product in 2016 and 18.5 per cent in 2020 (though his lower tax rates would probably put those targets out of reach). His budget outlays come in at 19.7 per cent and 19.5 per cent in 2016 and 2020, respectively. Of the total outlays in 2016, Mr Ryan targets “discretionary” programmes at 5.9 per cent of GDP; social security, 5 per cent; Medicare, 3.2 per cent; other mandatory spending, 3.7 per cent; and interest payments, 1.9 per cent.

Now consider Mr Obama’s budget unveiled in February. Federal revenues are targeted at 19.1 per cent of GDP in 2016 and 19.7 per cent of GDP in 2020, only about 1 percentage point above Mr Ryan’s revenue targets. In Mr Obama’s 2016 budget targets, discretionary spending is set at 5.9 per cent of GDP; social security, 5 per cent; Medicare, 3.2 per cent; other mandatory spending, 5.8 per cent; and interest payments, 2.5 per cent.

These are minuscule differences. Neither plan reduces the inexorable growth in government spending; they merely change the rate at which spending increases. Each plan achieves its objectives through a combination of hand-waving and wishful thinking.

By Dr. Sachs’s standards this is a triumph for small government.

Consider the graph above illustrating total U. S. government spending as a percentage of GDP. As you can see current spending is actually higher as a proportion of GDP than it was at the height of World War II, when the United States in fact had a command economy, and is more than twice as high as it was in the bad old socialist New Deal days. BTW, the ratio falling below 33% you see between 1995 and 2007 is not due to a decline in spending but rather to a sharp increase in GDP, something I see as illusory since it was the consequence of two successive bubbles. The spending is real but the additional production is bogus.

We’ve seen this debate before in the battle over healthcare reform. Government spending accounting for more than 60% of all healthcare spending, a ratio that the Republican ticket has committed to by default for the foreseeable future (unless you believe that the Ryan plan is a stalking horse for a complete abolition of government spending on healthcare, something not present in the plan itself), is a “free market”. Government spending accounting for something like 85% of total healthcare spending (as in, say, France) is intolerable socialism.

It’s madness. It’s all madness.

We already have socialism in the United States. It’s incompetent, inefficient, self-serving, corrupt socialism that serves mostly to redistribute income among the top 10% of income earners. And the people know it which is why confidence in government is so low and declining.

Our problem in the United States is not that the government isn’t disbursing enough of the country’s production. We’re spending plenty on healthcare, education, pensions, the military, and even infrastructure. We’re spending nearly 40% of GDP and rising. Our problem is that we’re not getting value for our money.

25 comments… add one
  • PD Shaw

    Sachs completely loses me in his opening paragraph. Does he live in the United States, or does he live in a European created simulation?

    This paranoid delusion about donors pulling the strings that keep taxes from being raised ignores the reality that most people who self i.d. as Republicans do not want taxes to increase. That’s one of the two major parties, he has to deal with, and if he doesn’t like their position he either needs to wrestle with it or support the Democrats. (The first thing we do is form a third party movement is right behind the first thing we do is amend the Constitution as useless hand-waiving exercises)

    When you poll people, they consistently and overwhelming report that their own tax burden is fine or too heavy. Only 1% think their taxes should be raised. Many will support increasing taxes on people making over a million a year. Does Sachs think he can resolve the tax problem by tripling marginal rates on people making over a million?

  • You could devote an entire post just to fisking the first paragraph. By what measure has President Obama championed “public investment and social support for the poor”? Rhetorically? Talk is cheap. What he’s actually done is produced a series of budgets that even his fellow partisans in the Senate won’t vote for.

    Championing would be getting something passed. Submitting budgets that Democrats in the Senate won’t vote for is just hand-waving.

  • It’s madness. It’s all madness.

    Engendered by political views. People who get caught up in election year politics become insane, IMO. A casual glance at that graph you have Dave puts the lie to just everything Sachs is saying regarding “small government”.

    We already have socialism in the United States. It’s incompetent, inefficient, self-serving, corrupt socialism that serves mostly to redistribute income among the top 10% of income earners. And the people know it which is why confidence in government is so low and declining.

    Right.

    Now, explain to me how voting is going to solve this problem. Seriously, how will casting your vote for Asshole #1 or Asshole #2 is going to make a difference. Your post says the differences, from a budgetary perspective, are miniscule. I’ll even let you consider third party candidates if you wish, but I’d like an explanation of how a third party candidate, once in office, isn’t going to become Asshole #3.

    No hurry, I’ll wait……

  • Drew

    I know I sound like a broken record, but madness it it. And the fiscal creep is inexorable. I have no more fundamental point. And when the economic and political realities of tax financing of spending were exhausted…….came the borrowing.

    I’m in the LBO business. I’ve seen this movie a hundred times. It always end the same, in financial ruin.

    Now we have numb nuts like Reynolds who ignore the reality of finances, and get all hysterical, and invoke caring, racism, greed whatever childish argument he wants to invoke on any given day.

    Me? I’m a manager and finance man. Paul Ryan isnt going to throw grandma over the cliff, Michael Reynolds and all the policies and politicians he support will. Because the trajectory is simply unsupportable.

    So could we have some sanity? I think Dave overstates the tax and government spending churn to the benefit of of the wealthy, after all, the basic arithmetic of who pays taxes vs who get paid just doesn’t add up. But I am oh, so sympathetic to the general notion that we don’t spend our precious resources on those we say we want to: the poor, the disabled and on.

    But as long as we have financial morons like Reynolds and his kind invoking childish emotions, we can’t deal with real finance like adults.

    Romney and Ryan will. Deny it if you want. but I guarantee it.

  • steve

    “Romney and Ryan will. Deny it if you want. but I guarantee it.”

    In the case of Ryan, we know that he voted for every spending bill he could find when there was a GOP POTUS. In the case of Romney, I am not sure what he believes. (If only we had a really, really conservative president, like Reagan. I am sure he would cut spending.)

    As to the chart, on the federal side, that is nearly all SS and health care spending. Since that is the largest, cohesive group of voters (wonder who they vote for?), it will be difficult to change. We have lots of potential models we can follow for health care. Everyone seems afraid to touch SS. Note how it is not mentioned in the Ryan budget and largely untouched in all other plans. Fortunately, it is not as much a problem as health care.

    Steve

  • What’s notable to me is how small the actual differences between what the candidates are proposing are. Nobody’s talking about actual spending cuts, just reductions in the rate of growth and the two candidates aren’t that far apart on that. If small changes were all that we needed, we wouldn’t have tens of millions of people unemployed or underemployed.

  • Andy

    Dave,

    From the numbers in the article, the difference between Ryan and Obama for 2016 spending is 2.7 % which would be the equivalent of over $400 billion dollars today. I don’t think that’s miniscule. And I’m making the assumption that both budgets assume the same baseline GDP for 2016 – I don’t know if that’s the case in reality.

    Also, it looks to me like the chart includes state and local government spending. I’ll have to look up the data, but as I recall, spending growth at the state and local level outpaced federal spending growth over the last several decades.

    Overall, though, I share your frustration – deeply share it in fact.

    Drew,

    Romney and Ryan will. Deny it if you want. but I guarantee it.

    They will what? As we can see from President Obama’s situation, the executive can’t do much of anything on the budget without the consent of Congress. What, exactly, will Romney and Ryan do and how, exactly, will they accomplish it?

  • Icepick

    Was Whosis all apoplectic back in the late 1990s with all the small government fervor back then? Was he ecstatic about Reagan increasing the size of government? Or is this more about his preferred party not being in 100% control?

  • Icepick, I think that 90%+ of the acrimony about now is affiliational rather than ideological or based on interest. Partisans are assuming that their guys will do things that they like and the other guys will do things that they hate.

    But the guys they like and the guys they hate are in material agreement in all sorts of areas. They’re interventionist. The want to leave the military at about the size it is now or increase it. They want to leave the healthcare system about the way it is now. Neither is opposed to redistribution. They just have different opinions about to whom to redistribute. Generally status quoist.

    That’s a fine attitude when everything’s working smoothly. Things aren’t working smoothly.

  • Ben Wolf

    I think the chart above is an aggregate of federal, state and local government spending. There is no way the federal government spends 35% of GDP; according to the World Bank it spends roughly 17%.

  • I know the chart is government at all levels. From the standpoint of deadweight loss, i.e. economic activity that’s simply lost, that’s what’s important. In 1932 total spending by government at all levels was about a third, relative to GDP, what it is now. There is some level of government spending at which the increase in deadweight loss exceeds the growth in the economy.

  • Icepick

    [H]ow, exactly, will [Romney & Ryan] accomplish [cutting the budget]?

    That would be through [the] combination of hand-waving and wishful thinking that Schuler mentioned.

    One of the problems I have had with the idea of having a private enterprise executive in charge of the government is that governments aren’t corporations. The man at the top has much less authority in government than in a corporation. At least Romney has governmental experience from Mass., but it isn’t clear that this will help all that much in DC, or that Romney accomplished miracles up North.

  • Ben Wolf

    @Dave Schuler

    Is there a hard definition of deadweight loss?

  • Icepick

    Dave Schuler’s 4:52 comment sums it up perfectly.

    Now to see if we can get voters to start acting like that is the case. Of course, I don’t even think Schuler is going to act like that’s the case, so I pretty much think we’re in the endgame. It’s just a question of how many moves it will take before the pieces get swept off the board and a new game is started.

  • PD Shaw

    I’d be interesting in seeing a disaggregation of federal vs. local spending, but these are not unrelated concepts. The federal government did not have the capacity to do what they wanted to do in the Great Depression, they initiated a system of subsidies of local spending which persist to this day. I don’t think you’ll find local/state spending increases before FDR. I’m pretty sure state/local government would spend less w/o federal involvement, but I’m not sure how much less, and how acceptable that would be to national identity.

  • Ben Wolf

    @PD Shaw

    More than a few states would go bankrupt without federal block grants, due to interstate trade imbalances. Basically what’s happening with Greece and Spain.

  • Zachriel

    Dave Schuler: BTW, the ratio falling below 33% you see between 1995 and 2007 is not due to a decline in spending but rather to a sharp increase in GDP, something I see as illusory since it was the consequence of two successive bubbles.

    It doesn’t show a decline after 2001, but an increase. The only decline was during the Clinton Administration. During the period, real per capita spending stabilized. As for GDP, there was real GDP growth as the economy was restructured for the information age. Huge new enterprises were created that still form a large part of the new economy.

  • I don’t believe that’s factually correct, Zachriel. Real per capita spending did not stabilize. Without doing all of the research, here’s a quick snapshot. In 1990 per capita government expenditures were around $8,400. By 2000 that had grown to $11,500. That’s nearly a 37% increase. Inflation from 1990 to 2000 was quite a bit less than 37%.

    I don’t think the “restructuring for the information age” argument holds up well, either. It suddenly stopped being the information age in 2007? I would say, rather, that GDP increases that were a result of restructuring for the information age were accompanied by a dot-com bubble that gave the temporary appearance of a lot more growth than actually took place. After 2001, for a variety of factors not the least of which was Fed policy, we entered a housing/financing bubble which also produced the illusion of a lot more growth than actually took place.

  • Andy

    PD Shaw, this should work. The data source isn’t the BEA, but it should give a good idea.

    Dave,

    In 1990 per capita government expenditures were around $8,400. By 2000 that had grown to $11,500.

    Here it is in constant 2005 dollars, split into fed, state and local.

  • Which supports the idea that per capita spending in real dollars did not, in fact, stabilize.

    My explanation of the relatively slow growth of spending per capita during the late 1990s is political rather than social or for policy reasons. When the president belongs to one party and Congressional leadership belongs to the other, there’s gridlock.

    An open question is whether gridlock is really the optimal strategy at this point. Arguments?

  • Ben Wolf

    @Dave Schuler

    I’m not sure it’s accurate to say that the slowing spending of the 1990’s was a product of gridlock. We’ve had oppositional branches before without the same effect. I suspect the events of that time were a unique result.

  • Zachriel

    Dave Schuler: Real per capita spending did not stabilize.

    We were referring only to federal spending. In 1992, it was $7081; in 2000, it was $7152 (2005 dollars).

    Dave Schuler: It suddenly stopped being the information age in 2007?

    No. We were referring to the boom of the 1990’s. There was a slight recession afterwards, but it left the U.S. in a strong position financially and economically. That the U.S. chose a different course in 2000 doesn’t mean that real gains weren’t realized in the previous decade.

  • Ben Wolf

    Keep in mind that slowing growth as a percentage of GDP does NOT require that government actually slow its spending. All that is required is for economic growth to exceed the budgetary growth rate, creating rhe appearance of fiscal restraint. What happened in the mid-late 1990’s? The private sector begain dis-saving and accumulating debt in response to the government’s attempts to balance the budget. In other words there was a boost to spending as credit expansion accelerated, which pushed GDP growth higher and the budget toward balance.

  • Zachriel

    Dave Schuler: As you can see current spending is actually higher as a proportion of GDP than it was at the height of World War II,

    Hmm. Taking a closer look at your chart, most put federal spending at 41% of GDP in 1944, and total spending at over 50%, not forgetting that GDP exploded during that period.
    http://www.usgovernmentspending.com/us_20th_century_chart.html

    Ben Wolf: What happened in the mid-late 1990’s? The private sector begain dis-saving and accumulating debt in response to the government’s attempts to balance the budget.

    That was the whole point of the Clinton plan, to spur private investment by reducing government borrowing.

  • jan

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