Larry Summers explains why the share of public spending in GDP will surge over the next few decades even if the role of government is left unchanged. The first reason is demography.
Between Social Security, Medicare, Medicaid and some smaller programs about 32 percent of the federal budget, or about 7.7 percent of gross domestic product, is devoted to supporting those over 65. The ratio of this age group to those of working age will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation. If no other adjustments are made, this implies an increase in federal spending of 5.6 percentage points of GDP. As Americans' health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. That would, however, be unlikely to counteract the expected 34 percent increase in the share of the population over the next generation who will be within 15 years of estimated life expectancy.
The second reason is debt interest. Even on optimistic assumptions, the recession will double net debt from 36% of GDP in 2007 to say 65% by 2020. This, plus a return to more normal rates of interest, adds another 1.5% of GDP to outlays.
The third reason is changing relative prices.
Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing, and more than a hundredfold relative to the price of televisions. Similarly, the complexity, and hence the cost, of everything from scientific research to regulating banks rises faster than overall inflation.
Add another 3% of GDP.
Even before you count the growing backlog of deferred infrastructure spending and the inevitable unwinding of various other deficit-concealing expedients, you come to a total increase in public spending of 10% of GDP--just to maintain "current policies".
This is the vital missing context for the Great Debate about the role of government and how we pay for it. It's absurd to put far-reaching reform of spending programs off the table, and equally absurd to rule out significant, broadly based tax increases. The US is being asked to choose one or the other. It will need both.
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