Tuesday, May 23, 2006

'Decline of the Republican Party' Part 5

It was Reagan, not Congress

National Debt by President
The national debt peaked at 120% of GDP in 1946 due to the war effort, but Roosevelt, Truman, Ike, Kennedy, LBJ, Nixon and Carter all did their part to bring the national debt back to pre-war levels. By the beginning of 1981, the national debt had fallen to 32.5% of GDP. Then, Reagan took office and the national debt took off. It rose non-stop for 12 years to 66.3% at the end of Bush's term, erasing 25 years of progress in paying down the national debt.

From the White House: The Reagan-Bush Debt Explained
The traditional pattern of running large deficits only in times of war or economic downturns was broken during much of the 1980s. In 1982, [Reagan's 1st budget year] partly in response to a recession, large tax cuts were enacted. However, these were accompanied by substantial increases in defense spending. Although reductions were made to nondefense spending, they were not sufficient to offset the impact on the deficit. As a result, deficits averaging $206 billion were incurred between 1983 and 1992. These unprecedented peacetime deficits increased debt held by the public from $789 billion in 1981 to $3.0 trillion (48.1% of GDP) in 1992.

The most popular national-debt web sites continue the same confusions that caused Reagan to believe the national debt was higher than ever when it was at its lowest point since before World War II. Here is what you see when you look at the debt in nominal dollars.

Brillig (named for Alice in Wonderland) has been reminded of inflation and has corrected for it by adding the following graph. But this still ignores population growth and that fact that the country has gotten a lot richer in the last 50 years. The result is still tremendously misleading, but you can see the Reagan rise and the Clinton dip.

The nominal Gross Domestic Product (GDP) takes all of these effects into account. It grows with inflation, population and increased income. By comparing the national debt to GDP, we get a fair check on whether it is growing or shrinking relative to what we can afford. That is why the White House web site give gross national debt as a percentage of GDP, which is what I have plotted on the page above.

The Heritage Foundation
Historical Context
The 7.9 percent of GDP spent on discretionary programs in 2005 was not far off the historical average. Discretionary spending topped 10 percent of GDP from World War II through the early 1980s, before falling to 6.3 percent in 2000, and then spiking back up to 7.9 percent in 2005.

Defense spending has driven much of these fluctuations. From 9.3 percent of GDP in 1962, it typically remained over 5 percent until the Soviet Union fell in 1991. Then, after dropping all the way down to 3.0 percent of GDP in 2000, the War on Terrorism has pushed it back up to 4.1 percent.

Non-defense discretionary spending has remained more stable over the past few decades. After dropping to 3.2 percent of GDP in 1999, it has since surged to 3.9 percent in 2005.

Recent Large Spending Increases
Conventional wisdom holds that non-defense discretionary spending has been cut to make room for defense spending increases. Conventional wisdom is wrong. According to OMB Historical Table 8.2, non-defense discretionary outlays – adjusted for inflation –surged by 34 percent between 1999 and 2005. That is the largest six-year expansion since the 1970s.

One way to compare current discretionary spending trends is by presidential administration:

Overall discretionary outlays rose 2.3 percent annually under President Clinton, compared to 9.7 percent annually under President Bush. Defense was virtually frozen in nominal dollars under President Clinton, and has averaged 12 percent annual growth under President Bush. Non-defense discretionary outlays rose 4 percent annually under President Clinton, versus 8 percent annually under President Bush.

Let me re-emphasize that last point: Non-defense discretionary spending has grown twice as fast under President Bush as under President Clinton.
Examples of discretionary spending increases between 2001 and 2006 include the following:

Education is up 62 percent, or 10 percent annually; International affairs is up 74 percent, or 12 percent annually; Health research and regulation is up 57 percent, or 9 percent annually; Veterans’ benefits are up 46 percent, or 8 percent annually; Science and basic research is up 40 percent, or 7 percent annually. and Overall non-defense discretionary outlays are up 46 percent, or 7.8 percent annually.

Budgets are about making trade-offs among competing priorities, and these recent guns and butter budgets raise serious questions about federal priorities. To enact the largest six-year non-defense discretionary spending hike, at the same time funding a war, has placed federal spending on an unsustainable path. Last week’s harsh reactions to the President’s budget proposal shows that certain constituencies have now grown accustomed to large annual spending increases, and consider even a temporary freeze at these higher spending levels to be out of bounds.

Large Entitlements Threaten Discretionary Programs
Discretionary spending faces a perilous future. The reason is not because the President’s budget proposal forecasts discretionary spending cuts through 2011. Discretionary spending is budgeted on a yearly basis, and any projected discretionary spending numbers after 2007 hold no statutory weight, but serve only as temporary placeholders to make future budget deficits appear smaller. These out-year numbers are typically dismissed by the White House when writing subsequent budget requests.

The real reason for concern comes from Social Security, Medicare, and Medicaid, whose steep growth will likely crowd out all other spending.

The math is simple. Annual spending on Social Security, Medicare, and Medicaid – what I call the “big three entitlements” – is projected to leap by 10.5 percent of GDP between now and 2050. That money will have to come from somewhere. The entire 7.9 percent of GDP currently spent on discretionary programs will be at risk.

It is possible that Congress will raise taxes to pay for this spending. However, Congress would have to keep raising taxes every year until they reach the current equivalent of $11,000 per household above current levels to fund those entitlement costs.

Assuming that Congress balks at such large tax hikes, it becomes more likely that discretionary spending will have to be substantially reduced to make room for those entitlements. Competition for scarce budget resources will become increasingly intense, and the big three entitlements will leave smaller and smaller crumbs for discretionary spending. Overall, Social Security, Medicare, and Medicaid spending increases are projected to squeeze out the entire non-defense discretionary budget by 2020, and the entire discretionary budget (including defense) by 2034.

The message is clear: If you prioritize spending on education, health research, veterans’ health care, homeland, security, defense or the environment – the single biggest threat to these programs is Social Security, Medicare, and Medicaid. The Congressional Budget Office estimates that within a decade, the big three entitlements will be growing $172 billion each year – which will be more than the entire combined budgets of the Departments of Education and Justice at that time. At that point, it will become difficult to maintain even a shell of current discretionary programs. Social Security, Medicare, and Medicaid will swallow almost all of the tax dollars.

No comments: