The U.S. appears to face a future of large, chronic federal budget deficits. Is that because taxes are too low or because spending is too high?
In one sense, the question can only be answered with a value judgment — possibly but not necessarily informed by economic evidence — about the appropriate size of government. A commonly used alternative, though, is just to look at past taxing and spending and see whether current or expected levels are way out of line. The choice of time period is to some extent its own value judgment, of course, but it has become common practice in the U.S. to look at post-World War II averages to get some sense of what the “norm” is.
So let’s do that! Federal spending since 1946 has averaged 19.3% of gross domestic product, while revenue has averaged 17.2%. Yes, that’s a recipe for chronic deficits, but in a growing economy, a deficit of 2.1% of GDP is quite manageable, and compatible with a federal debt that is shrinking in relation to the overall economy. Sure enough, federal debt held by the public has fallen from 106.1% of GDP in 1946 to 76.5% of GDP as of the end of the 2017 fiscal year on Sept. 31. (The drop is less dramatic if you look at gross federal debt, which includes money owed to the Social Security trust funds and has gone from 118.9% in 1946 to 105.4% in 2017.)
How do current and projected spending levels compare? In the 2017 fiscal year, spending was 20.8% of GDP and revenue 17.3 percent; by fiscal 2019, this year’s spending deal and last year’s tax cuts are expected to bring spending up to 21.2% of GDP and revenue down to 16.5%, according to projections released this week by the Congressional Budget Office. Spending has departed from the post-war norm more than revenue has. And if you look decades into the future, as the CBO last did about a year ago, spending is set to get much further out of line — rising to a projected 29.4% of GDP by 2047.
So when Manhattan Institute budget wonk Brian Riedl argues that “Social Security and Medicare’s shortfalls overwhelmingly cause the coming long-term debt,” and Hoover Institution economist John Cochrane states that “entitlement spending” on Social Security, Medicare, Medicaid and such is “the central budget problem,” they have a point!
Both were making these arguments in response to a Washington Post op-ed by five economists — Martin Neil Baily, Jason Furman, Alan B. Krueger, Laura D’Andrea Tyson and Janet L. Yellen — who all happen to have led the White House Council of Economic Advisers under Democratic presidents. Those five economists were in turn writing in critique of yet another Washington Post op-ed by Cochrane and four other Hoover Institution economists, all of whom (not including Cochrane) have held posts in Republican administrations.
The Republican economists’ op-ed was about the threat of a “debt crisis” brought on by the “long-run entitlement explosion” described above. I found its downplaying and misrepresentation of the role played by last year’s tax cuts in the growth of deficits irritating, so I too wrote a column critiquing it. But my response, and that of the five Democratic economists, also turns out to have downplayed and misrepresented something important: the likely future cost of Medicare.