A Budget Paradox
By Arnold Kling
Consider the following two sentences:
1. It is very difficult to cut Federal government spending, because so much of it is mandatory.
2. It is very difficult to increase Federal government spending, because so much of it is mandatory.
Reciting sentence (1) gets you admitted into the club of Expert Budget Pundits.
Reciting sentence (2) gets you sent to the loony bin. Or at least to the data, which show that Federal outlays went up 108 percent from 2000 to 2010, while the Consumer Price Index only went up 26 percent. (Below the fold, I will give a breakdown of outlays by category, if you would like to see that.)
The data indicate that it is not very difficult to increase Federal government spending, in spite of the large portion that is mandatory. Why not? Some hypotheses:
1. We tend to see discretionary increases in “mandatory” spending. As in the prescription drug benefit. Note that at the time the prescription drug benefit was enacted, nobody said, “You know, on the whole, the elderly are doing fine. We want to provide prescription drugs as an in-kind benefit, but maybe we should cut back on other transfers to the elderly in order to maintain generational balance.”
2. The government’s “cost of living” goes up much faster than the CPI. For example, with Medicare and Medicaid, outlays are tied to health care costs, and we all know that health care costs are rising faster than inflation.
Every time a budget wonk says “health care costs,” you should say to yourself “utilization of medical services.” That way, the phrase “we need to slow the growth of health care costs” becomes “we need to slow the growth of utilization of medical services,” which is a much more accurate description of what has to occur.
An effective way to hold down health care spending would be for the government to only pay for the medical services that you would have obtained in 2000, so that services above and beyond that are not paid for. No new equipment. No new forms of specialist practice. That would work conceptually to control health care “costs,” although I am not saying that it could be implemented in practice. Still, the point is that when we treat paying for every new medical gizmo and specialist visit as mandatory, we are giving the budget a self-inflicted wound.
3. Demographic trends, such as the longer life span and fewer children per household, are starting to bite. In that case, with the Boomer retirement bulge just starting, the worst is yet to come.
4. Note, however, that, apart from “net interest,” spending on every major category (not just “mandatory” spending) has risen much faster than the CPI over the past ten years. Without touching defense, Medicare, or Social Security, going back to the spending levels of 2000, adjusted for inflation would chop over $500 billion from the annual budget.
Or maybe the answer to the paradox is that when it comes to the Federal Budget, spending is discretionary when somebody proposes an increase in its rate of growth but mandatory when somebody proposes a decrease in its rate of growth.Spending, in billions, vs. Consumer Price Index
|Spending Category||2000 level||2010 level||Percentage increase|
|Consumer Price Index||174||219||26 %|
|Total Federal Outlays||1789||3721||108 %|
|Income Security||254||686||170 %|
|Social Security||409||721||76 %|
|Net Interest||223||188||-16 %|
Source: for spending, I took the figures in the 2010 Economic Report of the President, which by now are out of date for 2010. For the CPI, I took the data as of the January 2011 release by the Bureau of Labor Statistics.