The Deficit Argument, II
By Arnold Kling
Liberal and conservative economists are not as far apart on the issues of fiscal policy as it might first appear. Both sides share a concern that government growth could outstrip GDP growth.
The position of liberal economists on the U.S. Budget deficit is that in order to keep government from growing too quickly relative to GDP, we will need higher tax rates over the medium term (once the current recession is over). The position of conservative economists is that in order to keep government from growing too quickly relative to GDP, we need to keep taxes low.
Both sides agree that if GDP grows at 1.5 to 2.0 percent per year over the next 25 years, then the cost of entitlement programs, particularly Medicare, will rise even faster. As a result, assuming that other spending as a percent of GDP remains about where it is today, total Federal government spending would be around 27 percent of GDP in 25 years, compared with around 20 percent today.
Liberal economist Brad DeLong sees it as imperative to reduce the deficit and lower future interest costs, in order to leave room for this burst in spending. In his view, the Bush Administration tax cuts would “put the U.S. once more on the path to national bankruptcy.”
On the other hand, growth theorist Brad DeLong argues that
Today’s ongoing revolutions in biotechnology-and-information technology see technological progress of at least 15% per year in industries that make up 13% of total production — a direct leading-sector boost to economic growth of 2% per year. Indeed, today’s world economy packs more structural change and technological progress into a decade than the 20th century packed into a generation.
If he is correct, and GDP growth for the next 25 years is, say, 1 percent higher per year than the conventional forecast, then even with the rise in entitlement spending the ratio of total Federal spending to GDP will remain about where it is today. The deficits will go away, too.
DeLong (both of him) sees reducing entitlement commitments as unthinkable.
the baby-boom generation (and its elders) simply have too many votes, and we are (mostly) a democracy.
In contrast, the President’s Budget states flatly that
these programs cannot continue as they are structured today. We must make a different kind of promise to the retirees of tomorrow. We must not delay in enacting reforms to make these programs financially sustainable.
Is that what the real argument is about? If so, then perhaps my idea, to phase out Medicare, should be on the table.
For Discussion: Which is most likely to be the biggest determinant of how much government is involved in the economy: the rate of growth of the economy; the structure of entitlement programs; or choices made for the level of tax rates and non-entitlement spending?