Wednesday, March 21, 2012

Hyperventilating about Dystopia

Dystopia is one of those words that you don't read all that often in blogs about politics.  Yet it seems to be showing up with surprising frequency in recent discussions about the Ryan budget proposal.  You see, the proposal to reduce non entitlement spending to 3.75% of GDP by 2050 is going to require the dismantling of the government, at least according to the critics

But is this critique actually true?  Math would suggest it isn't.  In 2010 according to the CBO historical tables, Federal spending (ex-social security, medicare, medicaid, and interest) was about 13 percent of GDP.

Now let's make a few adjustments.  Let's exclude overseas contingency operations (Afghanistan and Iraq).  Today those account for about 1.0% of GDP.  Let's also exclude higher than normal automatic stabilizers (TANF, UI, etc) that account for about 0.5% of GDP.  That leave us an adjusted baseline of about 11.5% of GDP.

Now let's make some assumptions and do some math.  Let's assume that GDP grows at its average rate from 1970 to 2010 (about 2.8% real) and let's assume inflation of about 3 percent per annum.  This latter assumption is higher than what the government typically uses but the model isn't particularly sensitive to the inflation assumption.

If you now run the model out to 2050, the 11.5% of GDP under those assumptions would become 3.75% of GDP, exactly equivalent to the number in the Ryan budget.  Please note that Ryan doesn't get to the number with these assumptions but in aggregate, spending continues to grow under the Ryan budget at the rate of inflation throughout the period and still reaches the 3.75% target.  In other words, Ryan's budget "cuts" simply amount to a COLA on the federal government outside of entitlements.

Dystopia indeed.

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