Tuesday, March 15, 2011

Aargh! The Deficit Is a Secondary Problem

Here’s the headline from a top of page 2 article from the March 14 issue of The Wall Street Journal:

Serious Debate on the Budget Deficit Has Started

Here we go again …

No one chooses a budget deficit. Those choices are primary.

The budget deficit is a result of those choices. This makes it secondary.

The choices in question are spending policies and tax policies. I say policies instead of amounts, because our government officials are forced by bean counters and the legal system to pretend that they can predict the amounts more closely than they actually can.

But, even if we give them a lot of wiggle room on amounts (and we should) there are two bald facts to be reckoned with:

  • Government spending has been trending up.
  • Tax revenues have been flat.

These facts are after scaling for the size of the economy (which takes care of population growth, economic growth and price inflation in one step).

And, these facts are long term trends. We can quibble about short-term rates of change, but the big picture has been stable for 2-3 generations now.

Here’s the graph from the article:

Look closely. Over the last 40 years:

  • Social Security spending is up by 1/3.
  • Medicare spending has quadrupled.
  • Medicaid spending has quintupled.

Do the back-of-the-envelope calculation: these three used to be 4% of GDP, and are now closer to 10%. That 6% difference, in a $13,000B economy, is $780B. That’s far more than the average deficit over the last 10 years (cut Obama and the Democrats a break here by taking a longer sample: if they’d had the Bush economy maybe they would have acted differently).

And yet the article starts out with:

… An adult conversation has begun on the federal budget deficit.

And the follows with this whopper:

… The political climate is growing more hospitable to the kind of grand bargain needed to rein in the rest of the budget—potentially encompassing the tax code, the defense budget …

I’d say the reporters have been fooled about the level of maturity of the conversation.

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