Whiling away the last days of August, waiting for my clients and would-be client to come back from their vacations, I saw a Face Book cry-out from one of my closest (and most successful Wall-Street) friends. It went like this: “We need to cut taxes both personal and corporate, cut our massive government spending to a reasonable level to spur growth to levels where we can start to feel that things are on the right track.”
This is a fairly common refrain and one that is in many ways winning the economic and policy debate in Washington. But, does this cry-out have a factual basis? Do we need to cut taxes? Do we need to cut our “massive” government spending to reasonable levels? Will those cuts spur growth?
My company’s tag-line is “Fact Based Planning for Fact Based Results”. And while I am not an economist, in my current, copious free time I am seeking here to see if there are facts to answer some of these very basic, yet important questions.
Do We Need to Cut Taxes?
The most common measurement of US tax receipts and spending is their total as a % of US GDP. On that measure, the current US federal tax burden is at its lowest level since 1950. In the last 3 years of actual data, tax receipts have averaged 15.4% of US GDP. For most years since 1950 taxes as a % of GDP were in the range of 18%-19%.
While the current US tax receipts are at a 63 year low, the US has had 4 years of trillion dollar deficits, 3-4 million baby boomers reached 65 every year (taking Medicare and most taking Social Security), the national infrastructure repair backlog hit $2 trillion and our war in Afghanistan continued.
I believe the answer to if we should cut taxes further is a definitive no.
Do We Need to Cut our “Massive” Spending?
General spending as a % of GDP has increased “massively” over the past ten years and most significantly over the past 4 years. However, the majority of spending increases have occurred not because of new statutes, but because of the aging of the US population and the high level of defense spending.
Between 1970 and 2007, total federal spending averaged 20.2% of GDP. However, in the latest 5 year period, that number has jumped up by over 3 points to 23.3%. This equates to roughly $500,000,000 of yearly increased government spending.
In order to gauge where spending “increases” are excessive, I established a set of “% of GDP baselines”.*
|Federal Government Spending as a Percent of US GDP 1970-2012|
|FY 2008 – FY 2012||23.3||5.1||5.6||5.3||7.3|
|Difference FY08-12 vs Baseline||3.1||0.6||1.2||1.6||0.0|
|*Total BL – 1970-2007, SS BL 1970-2008, Defense 1990-2001, Health 1990-2005, Other 1970-2007|
Based upon current spending level comparisons to “normal, baseline spending”, it appears as if the US is in a new reality of spending vis-à-vis % GDP. This new paradigm is dictated by statutory entitlement programs and not discretionary spending. Moreover the “massive” increases in spending the country has seen in the last 3 years appear to be due to trends which may not moderate soon – 10-15 more years of baby boomer retirements, longer life expectancies, medical costs increasing faster than inflation and expanding program coverage (Obamacare/Medicare Part D). Accordingly, if we want to cut or reduce costs in these areas, we need a thoughtful renegotiation of the country’s social contract.
Defense spending appears to be an area where cuts can be made. Defense on average is 1.2% ahead of its “normal” base-line expenditure levels. This equates to roughly $200 billion per year.
“Other” federal spending (education, homeland security, housing, transportation, welfare and other agency spending) also appear to be areas that can be cut. Not because “other” as a whole has grown, as a % of GDP, “other” has actually slightly decreased. Rather “other” should be decreased because the times require it. However, when the US is still fighting a war on terror, 200,000 bridges in the country cannot pass a safety expansion, our children are falling behind other countries vis-à-vis training and education and states like Texas are actually choosing to no longer pave roads, budget makers have to weigh the risks and benefits of cuts in light of the US’s fading position as “the greatest country on earth”.
So the answer to “can we cut our massive spending” levels is: yes in defense, maybe in health and social security, but only with a renegotiation of our social contract and maybe in discretionary spending, but at the risk of further eroding the standing of the US in the world as the greatest country on earth.
Will Cutting Spending Spur Growth?
This one is easy: No. There is no proof anywhere that I can find that gives any evidence to the position that taking spending out of the economy will spur growth. If anyone who has made it this far in this article can find any proof, please pass it along.
We have serious problems in this country that need to be fixed with a reasoned and factually based approach. Based upon the evidence it would appear that this country needs to increase taxes, renegotiate the social contract, cut defense and find pockets of further savings in discretionary spending.
* Baseline assumptions – For “total” and “other” spending buckets, the baseline is the entire 1970-2007. For “social security” it is 1970-2008 (the last year before the baby boomers began retiring). For healthcare, I chose 1990-2006 (the year of Medicare Part D expansion). For defense the period is the 12 years between the wind-down of Reagan’s military build-up and the Afghanistan War).