Subscribe: RealClearPolitics - Articles - David R. Henderson
Preview: RealClearPolitics - Articles - David R. Henderson

RealClearPolitics - Articles - David R. Henderson

Last Build Date: Fri, 05 May 2006 00:01:32 -0600

Copyright: Copyright 2007

Why Spending Has Got to Give

Fri, 05 May 2006 00:01:32 -0600

One does not get less depressed contemplating the spending increases that are projected over the next 45 years. Credible estimates from the Congressional Budget Office and from independent budget analysts show federal spending doubling as a percent of GDP by the middle of the twenty-first century, reaching about 40 percent of GDP (see Figure 1). Yet some historical constants and some facts about Americans' views on taxes incline this observer to believe that federal spending will come nowhere close to 40 percent of GDP by mid-century. FIGURE 1 A Scenario for Total Federal Spending and Revenues, Percentage of GDP Source: Congressional Budget Office. Note: CBO categorized this scenario as one of high spending and lower revenues. The scenario is explained in detail in CBO, the Long-Term Budget Outlook (December 2003), 6-12. Before we turn to the good news, let us consider the bad news: the news on spending. Defense spending rose by $161 billion between fiscal years 2001 and 2005, an increase of $117 billion in 2001 dollars. This was large, and yet it took defense spending from a postwar low of 3.0 percent of GDP in 2001 (tied with 1999 and 2000) to 3.8 percent of gdp. Even if the U.S. government maintains a strong military presence in the world, which seems likely, it can do so with less than 4 percent of GDP. To see where spending is projected to grow substantially as a percentage of GDP, therefore, we must look elsewhere. The three programs accounting for most of this increase are projected to be Medicare, Medicaid, and Social Security. Medicare and Medicaid spending together are credibly predicted to be about 21 percent of GDP by 2050, and Social Security spending is expected to equal about 6 percent of GDP by 2050. All three are driven by demographics -- the aging of the U.S. population -- and the first two are also driven, ironically, by improvements in health care. Consider Social Security first. Social Security spending, which is now about 4.2 percent of GDP, is likely to be 6.2 percent of GDP by the middle of the twenty-first century unless changes are made in the program. This is due to two main factors: 1) the retirement of the baby-boom generation and 2) the increasing life expectancy of the elderly. The two factors together mean that the fraction of people aged 65 or older will rise from 12 percent of the population in 2000 to 19 percent in 2030. The working-age population, by contrast, is projected to fall from 59 percent to 56 percent.2 Based on this, the Social Security trustees project that the number of workers per Social Security recipient will decline from about 3.3 in the early 2000s to 2.2 in 2030.3 Of course, substantially increased immigration of younger people or a significant decline in life expectancy of the elderly could slow this trend but absent that, these population numbers are fairly firm. And absent a change in that ratio, absent policy changes in Social Security (more on that later), and absent a substantial increase in the growth of productivity, the increase in Social Security to about 6 percent of GDP is also fairly firm. The scarier numbers are in Medicare, the federal government's socialized medicine program for the elderly, and Medicaid, the program for the poor and near-poor: Not only is the number of people enrolled in these programs increasing, but spending per person has also increased and will likely continue to do so. Since 1967, the first full year of Medicare spending, spending has risen from 0.2 percent of GDP to about 2.3 percent in fiscal year 2004. Medicaid spending rose from 0.3 percent of GDP in 1970 to 1.5 percent in 2003, a quintupling of its share of output. Between 1970 and 2003, Medicare spending per person rose annually by 3 percentage points more than the growth of per capita GDP. Over approximately the same period, Medicaid spending per person rose annually by 2.7 percentage points more than the growth of per capita GDP. The spending growth comes from the combination of Medicare and Medicaid beneficiaries spending other people's money plus the incentive[...]