The Deficit Argument, III
one percent faster real GDP growth does not leave federal spending unchanged. A lot of government services require that bureaucrats be paid salaries: their salaries rise as fast as GDP per worker rises. Still more government programs–Social Security, unemployment insurance–are keyed not to an absolute poverty standard but to people’s wage levels.
What I was suggesting was that the ratio of government spending to real GDP would be reduced arithmetically by an increase in the denominator. DeLong disagrees. The starting point for his dissent is that higher real GDP would come from higher worker productivity, which would lead to higher real wages. True enough.
He also points out that Social Security payments are indexed to wages, so that Social Security payments would be higher in a high-real-growth scenario. Also true enough, although one might question whether this is a desirable property of the Social Security formulas.
However, Medicare is the big enchilada when it comes to future entitlements, and I cannot come up with a good argument for why Medicare costs should rise proportionately with real wages, particularly given the original assumption we are making that biotechnology becomes an engine for higher productivity and faster growth.
Finally, DeLong says that if real wages are higher in the economy, then they must be higher for government workers, also. However, he assumes implicitly that all of this gets passed along as higher cost to the government–there is no increase in productivity in the government sector.
DeLong’s assumptions about the relationship of government spending to real GDP imply large, persistent cost disease. I would think that the information and biotechnology revolutions should provide a cure for cost disease, unless the problem is bureaucratic inertia.
For Discussion: If the government is indeed subject to cost disease because of bureaucratic inertia, do you agree with DeLong’s conclusion that our only viable option is to maintain taxes at high levels in order to finance government spending?