John Taylor's Classic Dodge on Federal Spending

The ratio of federal spending to GDP is a measure of our policy choices, not a guide for them.

This morning, Professors John Taylor and Laura Tyson presented competing visions for the future of fiscal policy at the National Association for Business Economics Economic Policy Conference. And Taylor's presentation exemplified how conservatives mistreat the ratio of federal spending to GDP. The spending-to-GDP ratio is a reflection of our policy priorities, but conservatives act as if it should be a driver of them.

Taylor made arguments that are extremely familiar among conservative economists. Federal spending has risen well above historical averages and will remain above them for decades to come; revenues dipped in the recession but should soon be back in line with or a bit above historical averages. With spending above normal and revenue soon to be about normal, Taylor says it is "common sense" to bring spending back in line. He added (perhaps trying to get me to slam my head through a wall) that this is what a household or corporation would do in a similar situation.

Taylor wants fiscal policies to return government spending to somewhere between 19 and 20 percent of GDP by 2020; that would imply a federal government about a seventh smaller than what President Barack Obama proposes in his budget. But why should the ratio of federal spending to GDP today be about the same as it was through the postwar era?

There are two key reasons why the ideal spending-to-GDP ratio should change over time, and be higher in the future than it was in the past.

First, in the future, a smaller percentage of Americans will be of working age. That means spending on entitlements for the elderly should rise as a share of the economy. Also, the cost of health care and education have been rising faster than most other goods and services; since these sectors are disproportionately publicly financed, that is another reason to think the government should grow.

Second, our policy priorities have changed. The key conceit behind the Patient Protection and Affordable Care Act was that the federal government ought to be doing something that it wasn't: providing a universal health care entitlement. That costs money and it's no surprise that it should cause government spending to rise as a share of GDP.

Even Republicans, who vigorously oppose PPACA, can rarely bring themselves to say out loud that they do not believe the U.S. should have a universal health care policy. If conservatives don't think the federal government should be in the business of making sure people have health insurance, they should say so. If they do think it should, they should find a way to pay for it.

Now, maybe there could be offsetting factors to accommodate these circumstantial and policy changes without growing the overall budget. For example, with the Iraq war over and the Afghan war winding down, the U.S. can devote a much smaller share of its economy to the military than it used to. But the president's budget already calls for bringing defense spending below 3 percent of GDP for the first time since World War II, and that reduction is more than offset by increases elsewhere.

Or maybe the government could reform its health care system so that we no longer have drastically higher per capita health spending (public and private) than peer countries. That might enable us to provide more comprehensive coverage to an aging population without spending more public dollars. But our politics won't allow it. Democrats have a suite of cost control ideas, many of them included in PPACA, but they do not expect such drastic cost savings. Republicans effectively do not have a health reform agenda at all.

Since we have good reasons to spend more, yet lack avenues for achieving fully offsetting savings, it's reasonable for the federal government to account for a larger share of GDP than it has historically -- a point that Tyson made in her response to Taylor. But even if a full offset of costs were plausible, the larger point would stand: The ratio of federal spending to GDP should change with circumstances. There is no particular reason that federal spending must be below 20 percent of GDP, and many other countries that are prosperous and pleasant spend much more.

A reliance on the "return to historical average" argument allows conservatives to avoid getting into the policy weeds: They can avoid making a substantive case that the cost of demographic change should be borne through benefit cuts instead of higher taxes, or that it's not worth collecting more taxes to pay for a more robust safety net, including universal health care. Instead they can just point to the aggregate amount of spending and say, "Sorry, there's no room in the budget." It's simple. But it's not convincing.

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