Government spending

A little perspective on the debate over government spending. In Fiscal Year 2011 federal government spending is about $3.7 trillion, or roughly 24.7 percent of GDP. That's high - the average for 1971-2010 is about 21 percent. This is why Republicans are making such a fuss about getting spending under control.

At the same time, tax revenues are currently $2.2 trillion or 14.8 percent of GDP. That's low - the average for 1971-2010 is about 18 percent. So it's ridiculous for Republicans to say "we don't have a revenue problem, we have a spending problem." We have both problems.

Why has spending increased so much during the Obama Administration? Well, most of the increase was a result of the recession and financial crisis: TARP, unemployment compensation, food stamps, etc. have all contributed. But I think that when Republicans talk about runaway spending they're thinking of the government programs that fall in the category of "nondefense discretionary" spending. Roads, education, environment, all of those special programs that were part of ARRA like green technology investments. But let's look at that spending. Here's the data from the Congressional Budget Office:



The red line is nondefense discretionary spending from 1990 to 2012 (the 2012 figure is from the President's 2012 budget proposal). From 1990 to 2008, nondefense discretionary spending rose at an average rate of 5.3 percent per year. The solid green line on the graph shows this trend. Spending jumps above trend under the Obama administration. But all of the increase is in 2009 and 2010 and reflects the temporary spending under ARRA. Nondefense discretionary spending in 2011 was only $3 billion higher than it was in 2010, and the President's budget calls for no increase in 2012. By FY 2012, if Congress were to pass the President's budget as proposed (not very likely), spending would be just about back to the 1990-2008 trend line (the dashed part of the green line).

This actually overstates the spending increase under Obama because the 2009 budget was passed in 2008 when Bush was president. I've attributed it to Obama here because some of the spending under ARRA went in the FY 2009 budget, but some of the increase in 2008-09 was probably Bush's doing, not Obama's.

So where's the spending crisis? As Paul Krugman shows, a big chunk of the increase is in the category of "income security" - food stamps, unemployment compensation, and so on. But Republicans have wisely, I think, framed their arguments in terms of spending in general, not programs like food stamps. I don't imagine that threatening to default on our debt unless Democrats agree to cut spending on food stamps would poll very well.

Of course there's also the issue of entitlement spending (Medicare, Medicaid, Social Security). But the increase in spending on those programs is not Obama's doing, it's a decades-old structural problem. It's important to do something about these programs, but I'm going to suggest it's not a good idea to cobble together a solution four days before a government shutdown.

Some random thoughts on Medicare

1. It's not the "Ryan plan," it's the Republican plan. The Medicare privatization plan has been endorsed by the Republican party. Overwhelming majorities of Republicans in the House and Senate voted to make it law. Every Republican presidential candidate has come out in support of it - except Newt Gingrich, and that didn't turn out so well for him. Every Republican candidate should be forced to spend the next two years on the hustings with that plan stapled to their chest like a big ol' scarlet A.

2. I think most Americans would say that the Medicare problem is, how do we ensure that retirees have decent healthcare at a cost that doesn't bankrupt us. That problem has no easy answers. Any reasonable proposal ends up with panels of experts, bending of curves, and other pieces of impenetrable jargon. The Republicans, however, have managed to come up with a simple solution: transform the Medicare program into a voucher system. How have they done this? Simple: their plan is a solution to a different problem. For Republicans, the problem is not how to provide good health care at a reasonable cost, it's how to have the government spend less money on health care. And so the solution is a simple one - just spend less. But the plan does not actually address the problem that most Americans have in mind when they think of the challenges facing Medicare.

3. Under the Republican plan, are retirees required to buy the insurance that the government is going to subsidize or is participation voluntary? If participation is voluntary, then if the plan is implemented large numbers of retirees are not going to have health insurance for the first time since 1965. That's a pretty big deal. If buying insurance is mandatory, then is the plan constitutional? I thought that this was the kind of thing (no, this is exactly the thing) that Republicans thought the 10th Amendment forbade.

[Update: It appears that under Ryan's plan the purchase of health insurance is voluntary. I say "appears" because the Ryan plan actually does not exist as a concrete legislative proposal. The budget resolution that contains the proposal, which the House passed and the Senate did not, describes the changes to Medicare in broad terms. The Congressional Budget Office analyzed the plan. For the purpose of making its cost estimates it assumed that everyone eligible for the premium support would purchase health insurance. There's no good reason that I can think of for this assumption - the CBO ought to be able to estimate the price elasticity of demand for health insurance and come up with an estimate of the number of senior citizens who would go without. This number would probably be large: the average recipient would pay 2/3 of his/her health care costs under the Ryan plan compared to 20-25 percent now. It's therefore fair to say that under Ryan's plan, X percent of people who now are depending on Medicare will lose their health insurance coverage. X to be determined.]