With all the talk about the “fiscal cliff,” this ought to be an opportunity for Americans to get a lesson in government finances.
Instead, the campaign, and the weeks of jockeying that have followed it, have been marked by vague slogans about taxes and spending. Democrats focus exclusively on taxing high incomes, as if that alone would solve the problem. Republicans keep saying the U.S. doesn’t have a revenue problem, it has a spending problem, as if repetition made it true.
Meanwhile, some basic facts about budget arithmetic go unacknowledged. Confusing things further is a reliance on absolute numbers of spending and deficits which, if only because of inflation, are always setting new records for partisans to fulminate about.
Percentages offer perspective over time, especially when applied to government spending as a percentage of total economic activity, or GDP.
The first thing to recall from elementary arithmetic is that changing the denominator will change the percentage. Thus, the relatively low level of spending at the end of Bill Clinton’s second term – 18 percent – is less a sign of governmental thriftiness than of a healthy GDP, then at its dot.com-era peak.
It’s also a big reason why the current spending level – 22.4 percent of GDP – is larger. More robust economic growth would shrink the percentage. The state of the economy is reflected on the spending side as well: More people take advantage of “safety net” benefits during hard times.
The current spending percentage is high by historical measures, with18.5 percent of GDP the average over the last half-century, and is projected to hit 24 percent a decade from now. This has prompted several candidates to propose capping spending somewhere around 20 percent of GDP.
Lost in this argument is a factor that has been obvious for 50 years: the baby boomers are hitting retirement age. More than 200,000 boomers a month are leaving the labor force, a factor that also distorts data on employment. As the boomers hit their 60s, they have more medical needs. They are starting to collect the Medicare and Social Security benefits they have earned over long careers of working and paying taxes.
As Kenneth S. Baer and Jeffrey B. Liebman argued in a recent New York Times oped column, medical and retirement bills for aging boomers will be responsible for an increase in government spending worth 3.7 percent of GDP. Take that factor away, and projected spending isn’t that far out of line.
That’s not an “Obama spending spree,” as his critics have said. In fact, Baer and Liebman note, discretionary spending these last four years has actually declined by 1.4 percent a year in inflation-adjusted dollars.
Page 2 of 2 - The aging of the baby boomers was inevitable and predictable. It’s also temporary: Just as schools had to expand to handle boomers in the ‘50s and ‘60s, the retirement system will have to expand to accommodate them in the decade to come. As time passes, so will they, and spending will come down.
Congress can’t stop the boomers from aging, and it shouldn’t deprive them of benefits they’ve earned because of some arbitrary limit on government spending.
The MetroWest (Mass.) Daily News