Pethokoukis, Economics, Taxes and Spending

Spending at 18% of GDP? Is the GOP’s Balanced Budget Amendment realistic?

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National Review’s Robert Costa says a Republican BBA is on its way:

Frustrated by the months of non-stop budget fights, Senate Republicans are set to mount a fiscal counteroffensive this week with the reintroduction of a balanced-budget amendment. … Senate minority leader Mitch McConnell (R., Ky.) and minority whip John Cornyn (R., Texas) are leading the effort. They hope to unveil a bill by Thursday with unanimous Republican support. … House Republican leaders are also signaling their support. On Monday, former GOP vice-presidential candidate Paul Ryan endorsed the idea on Twitter. .. According to a Senate GOP aide, the legislation would cap federal spending at 18 percent of GDP. It would also require a supermajority for tax hikes and debt-limit increases.

I am not going to repeat here my concerns from earlier today about Washington policy focusing too much on further cutting near-term discretionary spending rather than pro-growth policies and entitlement reform.

Instead, let’s quickly examine whether capping federal spending at 18% of GDP is realistic. I am not sure it is. If the bill excludes interest spending? Maybe. If so, then the BBA would be capping spending at roughly the historical average of around 20% to 21% of GDP. But even doing that for the long term will be tough (especially without slashing defense spending to Europe’s minimalist levels). Recall that the Bowles-Simpson plan has a long-term spending target of 21%.

Over at e21, Charles Blahous explains how the the aging of American society will increase health care spending even if we are able to get a handle on health-cost inflation:

In recent years a seductive but incorrect picture of the federal budget became fashionable; the idea that the main thing we need to do to repair the budget is to conquer health care cost inflation in the public and private sectors alike. Unfortunately, it’s not true. Last year CBO estimated that over the next quarter-century, cost growth in the federal health entitlements and Social Security will be 75% attributable to population aging and only 25% to health cost inflation. Even in the health entitlements considered alone, population aging accounts for 60% of such cost growth, excess health inflation only 40%. Thus even in the unlikely scenario that we completely conquer health cost inflation, we would still have to confront the bigger problem of the growing number of people receiving federal health benefits

What would be a realistic long-term number? Well, back in 2011 a group of AEI scholars put together a budget that, through entitlement reform, was able to limit spending to 22.8% of GDP in 2035 with a debt-to-GDP ratio just shy of 60%. (See the above graphic.) So from where would the extra 2 percentage points or so come to meet a BBA goal of spending cap of 21% of GDP? And if the number really is 18%? …

10 thoughts on “Spending at 18% of GDP? Is the GOP’s Balanced Budget Amendment realistic?

  1. OK, Getting back to 18% of GDP would be great. But, why do we accept without discussion the idea that when the economy expands, spending should expand by a proportional amount? Do all government program costs magically go up because the people become more prosperous? Do education expenditures rise because GDP rises? Welfare? Social Security? Defense? Isn’t it a more sensible position that the percentage of the government’s share should, in fact, GDP rises?

  2. Edited: OK, Getting back to 18% of GDP would be great. But, why do we accept without discussion the idea that when the economy expands, spending should expand by a proportional amount? Do all government program costs magically go up because the people become more prosperous? Do education expenditures rise because GDP rises? Welfare? Social Security? Defense? Isn’t it a more sensible position that the percentage of the government’s share should, in fact, decrease as GDP rises?

    • Leaving aside that Social Securty and Medicare which have been designed to require higher per capita expenditures as the population ages, much government spending is like insurance, as people get wealthier, they generally insure more things. We want better weather forecasting, asteroid strike forecasting, higher standards for food and drug safety, global warming mitigation, etc.

      • ” Leaving aside that Social Securty and Medicare which have been designed to require higher per capita expenditures ”

        Social Security and Medicare are for laundering fiat money, a drastic reduction in the dollar’s value can’t possibly comply with government’s mission of serving everyone, serving commerce.
        The 1960 Supreme Court decision Fleming vs. Nestor held, in effect, that the US government doesn’t owe any Social Security taxpayer the time of day: ” In this 1960 Supreme Court decision Nestor’s denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor’s benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right. ”
        A gold dollar serves everyone …

        ” much government spending is like insurance, as people get wealthier, they generally insure more things. ”

        Rising prosperity is living more by commerce, less by coercion, more freedom, less government. Insurance is in the realm of commerce, not government.

        ” We want better … ”

        Includes better government. The true interest of government is the success, not the usurping, of commerce. Better government is less government and better commerce enabling you to supply yourself with no end of better stuff, as you see fit …

    • ” Isn’t it a more sensible position that the percentage of the government’s share should, in fact, decrease as GDP rises? ”

      Yes! Government’s job is serving everyone, everyone’s interest is commerce, government’s true interest is the success of commerce, streamlining itself, getting more efficient, shrinking. Fiat money doesn’t serve everyone, is a drastic reduction in the dollar’s value for damaging commerce, enlarging government. A gold dollar serves everyone …

      Your good comment deserves your real name, wish I could give it a recommendation as in the Wall Street Journal reader forum, hope you post your thoughts there also.

  3. A little honesty might be nice. An aging population means more elderly Medicare and Medicaid recipients, thus a larger multiplier for average per capita health care expenditures. Inflation makes things worse, of course, but an aging population IS the argument for controlling health care costs. This assumes that your goal is to find the most economic way to meet basic health needs. If your point is to cut taxes, then vouchers work because poor sick people eill turn to charity care once their resources are exhausted, as they do today. Just make sure you live in the wealthy county next door to the county with the overwhelmed public hospital.

    • A little honesty might be nice“…

      Yes, that would be refreshing todd

      An aging population means more elderly Medicare and Medicaid recipients, thus a larger multiplier for average per capita health care expenditures. Inflation makes things worse, of course, but an aging population IS the argument for controlling health care costs“…

      True but we can do better at controlling costs by eliminating the medicare/medicaid scams…

      This assumes that your goal is to find the most economic way to meet basic health needs“…

      Why should that be an assumption?

      If your point is to cut taxes, then vouchers work because…“…

      Who pays for the vouchers?

      Just make sure you live in the wealthy county next door to the county with the overwhelmed public hospital“…

      What does that mean or accomplish?

  4. 5% annual growth would double the size of the economy in 15 years, quadruple in 30 years. That should be our #1 national priority. Instead, apparently job #1 is socialism – for energy, education, medicine, retirement savings, finance, etc. How’s that working out?

    • 5% growth has never been a sustained growth rate since the Civil War, trend rate is much closer to 3.5% irregardless of policy programs. So please get realistic…

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