Larry Summers; The reality of trying to shrink government

[Winehole23]

With the selection of Paul Ryan (http://www.washingtonpost.com/politics/paul-ryan-r-wis/gIQAUWiV9O_topic.html) as the Republican vice presidential candidate (http://www.washingtonpost.com/politics/the-vice-president-and-his-challenger/2012/08/16/41239b60-e71b-11e1-a3d2-2a05679928ef_gallery.html), it is clear that the central issue in the presidential election will be the scale and scope of government involvement in the economy. There is disagreement over what constituted “normal” levels of spending in the past and, indeed, over what constitutes “spending.” But there is a widespread view in both parties that it is feasible and desirable that in the future the federal government should be no larger as a share of the overall economy than it has been historically.

Unfortunately, this is unlikely to be achieved. For structural reasons, even preserving the amount of government functions that predated the financial crisis will require substantial increases in the share of the U.S. economy devoted to the public sector.

First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare, Medicaid and some smaller programs about 32 percent of the federal budget, or about 7.7 percent of gross domestic product, is devoted to supporting those over 65. The ratio of this age group to those of working age will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation. If no other adjustments are made, this implies an increase in federal spending of 5.6 percentage points of GDP. As Americans’ health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. That would, however, be unlikely to counteract the expected 34 percent increase in the share of the population over the next generation who will be within 15 years of estimated life expectancy.

Second, the accumulation of more debt and a return to normal interest rates will raise the share of federal spending devoted to interest payments. In 2007, before the financial crisis, federal debt held by the public was equivalent to 36.3 percent of GDP. On a very optimistic view, where recommendations such as those of the Simpson-Bowles commission are implemented, net debt held by the public will nearly double, to 65 percent of GDP, by 2020. This implies that the federal government’s outlays to service its debt will rise from 1.7 percent of GDP in 2007 to 3.2 percent of GDP in 2020.

Third, increases in the price of what the federal government buys relative to what the private sector buys will inevitably raise the cost of state involvement in the economy. Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing, and more than a hundredfold relative to the price of televisions. Similarly, the complexity, and hence the cost, of everything from scientific research to regulating banks rises faster than overall inflation. These shifts reflect long-running trends in globalization and technology. If government is to continue providing the same level of these services, government spending as a share of the economy has to rise, by at least 3 percent of GDP.

Fourth, several methods that have been used to repress the deficit, such as federal pension liabilities and the deferred maintenance of federal infrastructure, will soon be unsustainable.http://www.washingtonpost.com/opinions/lawrence-summers-the-reality-of-trying-to-shrink-government/2012/08/19/0e786b40-ea00-11e1-a80b-9f898562d010_story.html

[Winehole23]

will involve considerable social pain, supposing our representatives are serious about doing it.

for better and for worse, there's little evidence they do.

[boutons_deux]

"the cost, of ... regulating banks"

:lol

[Winehole23]

the cost of deregulation/failing to regulate has been much the worse, yes

[AFBlue]

Romney/Ryan re-election talking points tbh.

[AFBlue]

"Large-scale reduction were not possible due to natural population growth, and the significant growth of the national debt from the previous administration."

[Winehole23]

Obama re-election talking points I think you meant. Romney/Ryan's policies are likely to hew to them closely if they want to be re-elected in 2016.

[Winehole23]

Do the arithmetic: Sometime in the 2020s (Summers isn't precise), these increases total more than 10 percent of GDP. Added to the historical level of federal spending - 21 percent of GDP - government expands by nearly half, to 31 percent of GDP.


You can quibble with Summers's numbers, but his broad conclusions are indisputable and challenge Republican and Democratic promises. Romney pledges to cut federal spending to 20 percent of GDP. Doubtful. Even deep reductions would offset merely some of the expansion. Obama claims that he won't raise taxes on the middle class (defined as couples with $250,000 or less of income). Fulfilling this would require either huge spending cuts or massive deficits forever.


What should the nation do? Summers punts. Here's his column's last sentence: "How government can best prepare for the pressures that loom, and how greater revenue can be mobilized without damaging the economy, are the great economic questions for the next generation."


Wrong. They are questions for this generation. They loom now; the longer we ignore them - as we have for decades - the harder the choices.


Summers, who has returned to Harvard, is widely regarded as a brilliant economist. Well, where would he draw the line at government so large that it undermines economic growth? At 22 percent of GDP? Or 26 percent? Anywhere? What spending cuts should relieve the pressure on taxes? Summers mentions defense (averaging 4.7 percent of GDP over the past 40 years) but notes that "in a dangerous world our military is badly stretched by sustained deployments that are far smaller than even the Persian Gulf War."


Even with major spending cuts, higher taxes will be needed to balance the budget. Are some taxes (a consumption tax, an energy tax?) kinder to economic growth than income taxes?


Could the welfare state - as I have argued - go into a death spiral? Higher spending spawns higher deficits or taxes, which reduce economic growth and make it harder to pay promised benefits without yet higher taxes or deficits. Summers doesn't say.
(Lest I be accused of hypocrisy, this column has repeatedly advocated the following: (a) elimination of wasteful or low-priority programs - Amtrak, farm subsidies, public broadcasting subsidies, among others; (b) higher eligibility ages for Social Security and Medicare, and less generous benefits for wealthier retirees; and (c) higher taxes, preferably an energy tax, to balance the budget after spending cuts.)


One role of "public intellectuals" - the small class of scholars, "experts" in think tanks and elsewhere, public-policy advocates and some pundits - is to elevate our public debates. They can say things that public officials cannot without losing their jobs or influence. At their best, idea merchants of left and right expand what's acceptable by broaching the new, unfamiliar or unpopular.


Summers's silence on government's size and role abdicates this responsibility. To some extent, that's understandable, given his personal history. Often blunt and outspoken, he has sometimes suffered the consequences: A short talk on women's capacity to become scientists ultimately led to his resignation as president of Harvard. But this may not be the whole story.


Ambition seems to have gotten the better of candor. His columns leave the impression that he's trying not to offend his political patrons. It's hard not to wonder whether he's auditioning for a job - head of the Federal Reserve? - in a second Obama term or some future Democratic administration. If this verdict seems harsh, it is perhaps softened by the certainty that the same calculated behavior applies to many other public intellectuals.
http://www.realclearmarkets.com/articles/2012/08/23/ambition_gets_the_best_of_larry_summers_99839.html