Our Real Deficit Problem Has Nothing to Do With Traditional Government

We shouldn't be forced into cutting Social Security, Medicare or other social insurance by the delusion that government does one thing, has one size, or that it all must be slashed.

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In last week's column, I discussed the fallacy of focusing on the total size of the federal budget, either as a measure of anything meaningful or as a basis for making policy decisions. This week, I want to talk about how this fallacy is distorting the deficit debate.

The important point to start with is that the government does many different things, ranging from national defense to personal insurance. Each of those things affects people differently, and how much of it the government does--if anything--should be an independent decision, just like businesses make independent decisions about investment opportunities.

To make things simple, instead of looking at every little thing the federal government does, I'll divide it into three parts (excluding interest on the debt): Social Security, Medicare, and Everything Else.

Traditional government is getting smaller. Social Security and Medicare are getting bigger.

In 1960, the last full year of the Eisenhower administration, taxes were 17.8 percent of GDP and primary spending (excluding interest) was 16.4 percent. Social Security took in and paid out 2.2 percent. Medicare didn't exist. So Everything Else had a primary surplus, with taxes at 15.6 percent and spending at 14.2 percent.

In 2010, in the supposed age of "big government," spending on Everything Else was only 14.7 percent of GDP, and that was swollen by the recession and stimulus spending. By 2021, according to the CBO's alternative fiscal scenario (the pessimistic one), spending on Everything Else will be 13.0 percent--less than in 1960. Everything Else tax revenues--that is, everything except the Social Security and Medicare payroll taxes--will be 12.5 percent of GDP, for a primary deficit of only 0.5 percent. And that's assuming that all of the 2001, 2003, and 2009 tax cuts are extended indefinitely.

Now, we can have a debate about Everything Else: some people may want more defense, others may want more environmental protection, and others may want less of both and lower taxes. But the traditional government has been getting smaller and does not have a long-term deficit problem.

Social Security and Medicare, by contrast, are getting bigger and do have problems. In 2021, Social Security is projected to have income of 4.5 percent of GDP and outgo of 5.3 percent, for a deficit of 0.8 percent. Medicare is more complicated because it was never designed to be fully self-funding. But its dedicated revenues in 2021 (mainly the Part A payroll tax and premiums for Parts B and D) come to 2.4 percent of GDP, while gross spending will be 4.3 percent, for a deficit of 1.9 percent. And those deficits will only get bigger.

Fine, you may say, but it's all government, and if you add it back together it's too big. But what does that mean?

Presented by

James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.

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