Saturday, January 05, 2013

We Don't Have a Spending Problem. We Have an Aging Problem

Kevin Drum explains We Don't Have a Spending Problem. We Have an Aging Problem.

"But even with the 2008 recession, federal spending is still on track to be lower a decade from now than it was when Reagan took office…tax revenue was 19.6 percent of GDP when Reagan took office, and it's projected to be 19.2 percent of GDP in 2017."

"The facts are pretty clear. Spending isn't our big problem. The recession spike of 2008 aside, it's about the same as it was 30 years ago. But instead of paying for that spending, we've repeatedly cut taxes, which are now at their lowest level in half a century. Tax revenue will go up as the economy improves, but even five years from now it will still be lower than it was when Reagan took office.

So what's our real problem? That's simple: America is getting older and healthcare costs are rising. That means we'll need to spend more money in the future on Social Security and Medicare. There's simply no way around that unless we're willing to immiserate our elderly, and that's not going to happen. Not only is it politically inconceivable, but the truth is that even Republicans don't want to do it, no matter how tough a game they talk. Like it or not, this means that over the next 20 or 30 years, spending on the elderly is going to go up by three or four percent of GDP."

"Add in the increased spending on the elderly, and federal outlays are going to be in the neighborhood of 23-24 percent of GDP by around 2030. Those are simply the facts. Even under a scenario where we control spending pretty tightly, spending is going to go up to about 24 percent of GDP."

He showed some graphs and they were simple enough I tried to recreate them in FRED. It's always a little tricky as FRED has lots of different versions of economic statistics and I don't understand the subtle (or maybe not so subtle differences) but I got basically what he showed for Current Federal Expenses (red) and Current Federal Receipts (green) and divided by GDP, I also ran it back to 1947 (note his include estimates out to 2017 that I couldn't do in FRED).

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