Government Spending and the War in Iraq

I thought I’d follow up on my post about spending $2.8 trillion. There were two comments to that post. The first is Joe’s,

So you would rather lose the war in Iraq than suffer the hardship of a budget deficit that’s 2% of GDP?

The second was by yetanotherjohn,

Well given the many thought provoking and workable solutions the democratic minority put forward to solve problems like social security, its obvious that all these problems will be solved within a month of a democratic congress being elected.

I think FDR did a lot of things wrong that are still harming this country (the threat to pack the supreme court which led to the changed view of the constitution that let congress involve itself in anything no matter how tenuous the connection to trade between the states is right at the top). But I don’t blame FDR for running a huge deficit before December 7th to build up the US defense or after December 7th to win the war.

The problem I see here is that one party shows it is willing to win the war and neither party shows it is willing to control spending. As a realist, I won’t abandon the republicans because they aren’t acting purely and perfectly as conservatives. I will be looking for a president in 2008 who would count noses on the conservative coalition in congress and recognize that a presidential veto can be upheld to control spending.

Both of these comments seem to be motivated by the part of my post that favors having one part of the government controlled by one party, and another controlled by the other party–i.e. Gridlock. If the Republicans lose control of the Senate and/or the House of Representatives then perhaps spending would be brought back into line with historical norms. Maybe.

Now Joe’s reply looks pretty good. It is also short sighted and ill-informed. Sure right now the deficit is projected to be between say 2-3% of GDP. Not bad at all compared to previous deficits, and especially deficits during war time. So where does it go wrong?

The deficit, if nothing is done, will not remain at 2-3% of GDP. If one were to look at the budget for 2007 the estimated deficits as a share of GDP are going to decline down to 1.2% of GDP by 2011. But even this doesn’t give us all the informtion to realize why this problem of spending and the reluctance to control it is a serious problem.

Social Security and more importantly Medicare are going to start to expand…and expand by enormous amounts as the Baby Boomers start to retire. Here is an article by Craig Hakkio and Elisha Wiseman on the fiscal problems these two programs pose for the U.S. Buried way down on page 28 of the article we find that the Social Security Trustees have estimated this shortfall to be $35.6 trillion for the next 75 years and $79 trillion if we use an infinite horizon. This means that to address this problem taxes would have to increase right now by 5.7% of GDP (or 8.3% of GDP for the $79 trillion). Waiting would simply mean larger tax increases in the future. Historically, government receipts in the U.S. have been about 18% of GDP. Thus, this problem could increase that percentage by one third to one half.

Now yetanotherjohn’s respons also looks reasonable, but I argue it too is ill-informed. This current president is responsible for at least a signicant portion of the the short fall discussed above. You see, Haikko and Wiseman breakdown the $35.6 trillion into Social Security, Medicare HI (Hospital Insurance) and Medicare SMI (Supplemental Medical Insurance). The breakdown is thus,

  • Social Security $5.7 trillion,
  • Medicare HI $8.8 trillion,
  • Medicare SMI $21.1 trillion.

President Bush’s Prescription Drug program falls under Medicare SMI and is one of the reasons why it is so large.

Conservatives (the Republican party) have already had a chance to control spending, even in a minor way as I noted in my initial post and have failed miserably. Not only have they failed to control non-defense spending by holding the growth rate in spending constant, but have helpd the President expand government transfer programs to such and extent that we are facing even larger tax increases in the future. Given the cowardice of may politicians in regards to raising taxes, we can rest assured that not much will be done about this problem in the next decade or so and the tax increases I mentioned above will do nothing but get larger and larger (e.g. waiting until 2021 would mean a tax increase that is 7.5% of GDP).

As I noted to Joe in comments to the previous post. We don’t have to worry about losing the war on terror to the terrorists and hence our way of life. We seem to be doing more than an adequate job at enacting policies that are putting our way of life in serious jeopardy.

FILED UNDER: Economics and Business, US Politics, , , , , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    There are a number of ways of addressing the Social Security shortfall other than an increase in the rate of taxation. These include making more income subject to the tax (either by increasing FICA max or through policies which encourage the incomes of average Americans to grow more rapidly—in my view that’s a key source of the problems on the horizon i.e. insufficient income growth in a broad segment of the populace and reluctance to subject the increased income of those whose incomes are rising), increasing Social Security retirement age, means testing, borrowing, and so on. I’ve been predicting that the Social Security system will achieve solvency by some combination of those measures for a long time.

    Medicare/Medicaid is significantly thornier and accounts for a much greater liability. I think that given the rule-sets in place that the problem is intractable which suggests that solving the problem in a meaningful way will require a major upheaval in the entire system. Perhaps nanotechnology or genomics or some other technology will pull our corporate onions out of the fire.

    Of course, that will cause the Social Security system to collapse but you can’t have everything. 😉

  2. vnjagvet says:

    IMO, the prescription drug benefit had a major part to play in assuring Bush of reelection in 2004.

    That, in essence, innoculated him from the usual drift to the Dems by the 55 and older demographic. Without that vote from older vets and others, I believe he may well have lost.

    Sometimes practical politics must trump ideology, unfortunately.

  3. Michael says:

    vnjagvet:

    Sometimes practical politics must trump ideology, unfortunately.

    Politics only trumps ideology when the politician in office is more important to you than the ideology in office. What good is having a conservative in office if he must act like a liberal all the time to stay in office?

  4. Bonddad says:

    1.) Your statement about the current budget deficit is half right. According to the Bureau of Public Debt, the Treasury issued over $550 billion per year for the last three years. This years total does not look better. In other words, there is a severe structural problem with the current budget process.

    2.) Using the infinite time horizon is statistically dishonest. According to SS actuaries, there will be enough money coming in until 2042 at which time there will be enough money to pay 75% of then current benefits. While this is not optimal, it is not as terrible as the infinite time horizon statement implies.

    3.) Thank-you for noting the Republican controlled Congress has been terrible at controlling any spending.

    4.) Regarding health care, the US system is a joke. Of all OECD countries, we spend far more per person and as a percentage of GDP than any other OECD country. 30% of current expenses in the private sector go to administrative costs alone. That’s a huge problem. While I don’t have a complete answer, the current situation is obviously not working.

  5. vnjagvet says:

    Michael:

    No one ever gets everything they want. All I can say is he (Bush) was better than the alternative, and that is how I make my choices in an election.

    For me, national defense trumped all other issues, and I could not abide Kerry as a Commander in Chief because of his antics after his Vietnam service. I had an emotional blind spot there, I suppose, but there it was.

  6. Steve,

    You still have to make the case that either the democrats would be more controlled than the republicans on spending. Take a look at some of the pork busting legislation. It had bipartisan support on both sides. But for the bills I have looked at, more republicans (both in absolute numbers and in percentage of their caucus) were on the pork busting side than the democrats.

    Further you have to show that there wouldn’t be unintended side effects. Think about the impact on the GWOT if the democrats got control of either chamber of congress and forced us to run away in Iraq because they cut funding. We would show we are not to be trusted to bear any burden, endure any hardship in the pursuit of freedom. Countries like Pakistan would likely decide the better course of valor would be to seek accommodation with the terrorists. If you think Iraq is a recruiting magnet for terrorists, wait until you see what happens if it is perceived that they beat the US and made us run away.

    Do I like this free spending in congress? No. Do I want to see it stopped? Yes. Do I want to see it stopped so much that we should enter into a suicide pact for western civilization? No.

    I will repeat what I said and you didn’t address.

    “The problem I see here is that one party shows it is willing to win the war and neither party shows it is willing to control spending.”

    Show me a way to both win the war and control spending (I agree that most of the increase in spending hasn’t been war related). And like it was under Reagan, I had to bite my tongue when I saw the deficit continue to rise, but winning the cold war was more important. Dhimmitude is not an option and pushing of the problem of the deficit (like we did under Reagan) is preferable to losing this war.

    If both parties were equally committed to winning the war, I would agree that a split congress would be a way to deal with this problem. Lacking that option, as I said I would look more to getting a fiscal conservative who is committed to winning the war into the White House. The fiscal conservatives are enough in both chambers to sustain a veto.

  7. I’m not getting it. Your point is that you’re okay with the spending to date for the war in Iraq as long as Bush does something about the spending in the next administration, or the one after that?

    They tried to deal with entitlements and got shot down. They brought in a prescription drug plan that’s bad enough, but a helluva sight better than the one Kennedy and Clinton would have wanted. and they ended up with a world war in their laps.

    Did you expect Bush to shoot magical Conservative Chi Rays from his hands and make Congress do exactly what he wanted instead of what he could get?

    I mean, hell — the guy has eliminated two fascist regimes, fought a major war and a major recession following the only attack on the modern US mainland, did it with deficit spending that would make most corporations green with envy, reduced the deficit at a dramatically better rate than expected, in six years. And you’re groused because they didn’t do it as cheaply as you’d like.

    “Conservatives,” you say, “have already had a chance to control spending, even in a minor way … and have failed miserably.”

    Okay, so tell us — what program do you propose, as politically feasible, to fix that? I suppose you could elect more budget hawks — but budget hawks don’t seem to get elected all that often.

  8. Brian says:

    I think the argument is not that the Democrats would do a better job on controlling spending if they had control of the House, Senate and Presidency. The argument is that if the Democrats took one of the chambers, the divided government would do a better job of controlling spending. Divided government means gridlock, which means less money going out.

  9. Brian says:

    To be clear, I understand that’s the argument most were making. I aimed the comment at Charlie, as electing a Democratic congress is a politically feasible way to reduce spending. If we wait for budget hawks to be elected, well, it never will. It’s easy to be a budget hawk as long as your own pork is not cut.

  10. John Poleshek says:

    No one gets elected in this country by cutting spending for their districts rather they get elected by sending more pork for their individual
    districts.Now the war spending is a different matter that is strictly a presidental choice ratified by a rubber stamp congress.

    The spending problem is a symptom of a larger disease of which I may explain at a later date.

  11. Brian,

    But the point I am trying to make is not that a divided government approach wouldn’t have a strong potential to reduce government spending (I think it would), but rather that the divided government approach could have disastrous unintended consequences that would be much worse than the increase in government spending, namely losing the war on terror.

    Again, show me that both parties equally are committed to winning the war on terror and the divided government approach becomes a reasonable solution. But not when they have such a diverse view on winning the war.

    Further, Steve points to the problem with social security and medicare spending requirements ballooning in the future. I agree that something needs to be done about this. But do you really think a divided government is going to tackle the problem? Divided government is much more suited to maintaining the status quo than solving complex and politically unpalatable problems.

  12. Steve Verdon says:

    Dave,

    Perhaps I’m missing something here, but this,

    There are a number of ways of addressing the Social Security shortfall other than an increase in the rate of taxation. These include making more income subject to the tax (either by increasing FICA max or through policies which encourage the incomes of average Americans to grow more rapidly—in my view that’s a key source of the problems on the horizon i.e. insufficient income growth in a broad segment of the populace and reluctance to subject the increased income of those whose incomes are rising), increasing Social Security retirement age, means testing, borrowing, and so on. I’ve been predicting that the Social Security system will achieve solvency by some combination of those measures for a long time.

    Will both increase taxes as a percentage of GDP and will also increase government receipts as a percentage of GDP. So this doesn’t even really address the point I’m making…it supports it. Hell we could tax the imputed rental value of homeowners homes if we want to go down the “tax currently un-taxed income” route.

    Bonddad,

    2.) Using the infinite time horizon is statistically dishonest. According to SS actuaries, there will be enough money coming in until 2042 at which time there will be enough money to pay 75% of then current benefits. While this is not optimal, it is not as terrible as the infinite time horizon statement implies.

    Baloney. This is standard practice in both economics and statistics and makes a rather cumbersome calculation much more tractable. And using an infinite time horizon does nothing to the insolvency date you note. Further, once the SS Admin. doesn’t have enough money to pay full benefits, IIRC, they are bound by law not to make any payments at all.

    4.) Regarding health care, the US system is a joke. Of all OECD countries, we spend far more per person and as a percentage of GDP than any other OECD country. 30% of current expenses in the private sector go to administrative costs alone. That’s a huge problem. While I don’t have a complete answer, the current situation is obviously not working.

    Talk about statistically dishonest! First, there are differences in population. We always hear about how fat Americans are. Could that be playing a role? Further, monetary costs are not the only costs. Waiting 6 months for access to an MRI for a painful, but none-life-threatening problem imposes costs on the individual and hence society, but is not a monetary cost and can be ignored by many of these OECD countries. This doesn’t mean that our system here in the U.S. is great, but just looking at money can be highly misleading.

    YAJ,

    You still have to make the case that either the democrats would be more controlled than the republicans on spending.

    No, I don’t. I haven’t argued that Democrats will be better, in fact I’ve argued that gridlock would be better where neither party controls everything.

    Further you have to show that there wouldn’t be unintended side effects. Think about the impact on the GWOT if the democrats got control of either chamber of congress and forced us to run away in Iraq because they cut funding.

    Another strawman. I’m not aguing that abandoning the GWOT wouldn’t have bad outcomes, I’m arguing that the Republicans have been so fiscally irresponsible that the idea of abandoning the GWOT and going with gridlock may be the more attractive alternative when you look not just at the GWOT but at other things such as the fiscal mess that is getting worse and worse.

    Do I like this free spending in congress? No. Do I want to see it stopped? Yes. Do I want to see it stopped so much that we should enter into a suicide pact for western civilization? No.

    Again, this is the “GWOT” allows me to ignore even potentially disasterous fiscal irresponsibility. Here is a thought for you, what if the fiscal irresponsibility gets so bad we have to stop the GWOT. What does that get you?

    Show me a way to both win the war and control spending (I agree that most of the increase in spending hasn’t been war related). And like it was under Reagan, I had to bite my tongue when I saw the deficit continue to rise, but winning the cold war was more important. Dhimmitude is not an option and pushing of the problem of the deficit (like we did under Reagan) is preferable to losing this war.

    Reagan at least controlled non-defense spending. Further, part of the deficit was due to tax cuts not just spending increases. Finally, we faced an enemy who was using a bankrupt economic system which pretty much assured us of their failure so long as it didn’t turn into a hot war. So the two situation are not at all analogous.

    Oh, and where the fuck did I say anything about Dhimmitude? I’m not saying capitulate to the terrorists, but that the Republicans have fucked things up so much, that continuing the war is no in jeopardy.

    Charlie,

    I’m not getting it. Your point is that you’re okay with the spending to date for the war in Iraq as long as Bush does something about the spending in the next administration, or the one after that?

    Uhhh, no. What I’m saying is precisely what I’ve written in my posts and in comments. The Republicans have been so profiligate when it comes to spending they are putting continuing the GWOT in jeopardy.

    Let me put it this way. Paul O’Neil, the former Sec. Treasurery, once commented that Cheney said, “Deficits don’t matter anymore.” At the time I was reluctant to believe that…today I believe it. After watching the pork and horrible bills pass time after time, I can’t not believe it. As I noted, Reagan at least restrained non-defense spending where he could. With Bush it has been the exact opposite…spend, spend, spend.

    We have to pay for these deficits someday. Eventually taxes will have to go up. On top of this we have Social Security and Medicare. Gridlock wont solve these problems, but at least it would reign in the discretionary spending to some degree and likely defense spending as well.

    Did you expect Bush to shoot magical Conservative Chi Rays from his hands and make Congress do exactly what he wanted instead of what he could get?

    No, but vetoing some of these bills would have been a good start. Not putting forward the prescription drug program another. He is a complete failure at restraining spending. Hell, he isn’t a conservative but a liberal save for abortion, gays, and the GWOT. He is basically Joe Lieberman lite.

    I mean, hell — the guy has eliminated two fascist regimes, fought a major war and a major recession following the only attack on the modern US mainland, did it with deficit spending that would make most corporations green with envy, reduced the deficit at a dramatically better rate than expected, in six years. And you’re groused because they didn’t do it as cheaply as you’d like.

    Did you even read this second post? The above is moronic. The problem isn’t that the current deficit so much as that he has put us even further on an unsustainable path when it comes to health care and spending. He can’t even make token cuts right now. The man is an abject failure when it comes to restraining spending. He talks about people spending money more wisely than the government, but he doesn’t really mean it.

    But the point I am trying to make is not that a divided government approach wouldn’t have a strong potential to reduce government spending (I think it would), but rather that the divided government approach could have disastrous unintended consequences that would be much worse than the increase in government spending, namely losing the war on terror.

    And you keep ignoring that letting spending go unchecked could also have disasterous consequences. You assume that unsustainable spending will have little to no effect (or that it will be magically taken care of, or something). This is where you keep falling down. I know you don’t want to abandon the GWOT. You’ve explained your reasons. Why, though, wont unsustainable spening matter? Are you really willing to risk the future economic success of this country (so much so as to put the future elements of the GWOT at risk)? So far the answer appears to be a resounding “Yes!”

    Further, Steve points to the problem with social security and medicare spending requirements ballooning in the future. I agree that something needs to be done about this. But do you really think a divided government is going to tackle the problem? Divided government is much more suited to maintaining the status quo than solving complex and politically unpalatable problems.

    I didn’t make this argument. I quite explicitly noted that gridlock would at least restrain current spending. I see the Medicare and Social Security problems as being very difficult politically…perhaps even impossible until a crisis actually occurs. But at least getting better control of the current spending would help in some way. And for fuck’s sake stop it with the Goddamned transfer programs like the prescription drug program. Don’t take a really bad problem and make it even worse.

  13. Dave Schuler says:

    I guess I’m not expressing myself clearly enough, Steve. WRT Social Security I proposed four (or more) alternatives for reform. Only the first of which can remotely be construed as increasing taxes relative to GDP. My preference as stated in my comment is for policies which would a) increase GDP; and b) result in an increased proportion of the increase to accrue to income quintiles who earn less than FICA max. This does not necessarily equate to a greater proportion of national income being taxed. It may. It may not.

    My key point is that as a source of the foreseeable problems in store for our fiscal house Social Security is a red herring: there are non-Draconian ways of addressing the problem. We need to focus our attention on the real problem, Medicare/Medicaid, and IMO if you don’t want a fully socialized system you should propose and get behind systemic reform that will result in cost control (which demand side reforms will not do) or else that’s what we’ll be stuck with.

  14. jwb says:

    Steve Verdon: brave and logical on the topic of spending restraint. Commentors: idiotic Cheney bots who tell Steve that if he reduces the deficit, al Queso has already won.

    You might as well switch to the Democratic party, Steve. You’ve already been labelled a Defeatocrat by your own readers.