Real Clear Markets

A Pop Quiz About Federal Spending That May Surprise You

Some years ago, former Senator and one-time Harvard professor, Daniel Patrick Moynihan, remarked “It isn’t what you don’t know that hurts you. It’s what you know that isn’t so.” In that spirit, readers: here is a short quiz. Please don’t worry. The quiz is short. You won’t be graded. And you may be surprised.

Question 1: The federal government is spending a larger share of national income than at any time since World War II—True or False

Question 2: The federal government is collecting a larger share of national income in taxes than at any time since World War II—True or False

Question 3: Social Security is currently running a deficit—True or False

Question 4: Health care spending is outpacing the growth of income—True or False

I suspect that large majorities of Americans would answer ‘true’ to at least one, and perhaps to all four, of these questions. Yet, the correct answer to all four is ‘False.’ That you would answer ‘yes’ to any of them shows the unfortunate success of the campaign of misinformation to which Americans have been, and are being, subjected. And this misinformation is doing the nation profound harm.

Let’s start with government spending. According to the Congressional Budget Office, the Federal Government will spend 21.7 percent of GDP next year under current policy. Were the U.S. economy operating at capacity, that share would be less than 20.6 percent, because output would be higher and spending for such items as unemployment insurance would be lower. For the preceding three decades government spending averaged 21.1 percent of national output. In brief, the numbers flatly contradict the assertion that spending is ‘out of control.’

In fact, the reverse is true. The sharp rise in health care costs over the last three decades and the increased outlays to fight two wars and maintain homeland security after the calamitous events of 9/11 mean that federal spending on the rest of government is slated to take a steadily declining share of national output.

Well, what about taxes? The story is almost the same. Federal government revenues are projected to be 16 percent of national output, compared with an average over the last three decades of 17.7 percent. Spending and revenues are both lower than the average of the last three decades, not higher.

Which brings me to spending on Social Security and health care—the two largest elements of the alleged, but nonexistent, ‘entitlement crisis.’ Social Security is projected to have reserves at the end of 2013 $41 billion higher than it had at the start of the year. At the end of 2014, its reserves are projected to rise by another $42 billion. In 2020, reserves are projected to be $285 billion higher than at the end of 2013. What this means is that Social Security is currently running not deficits but surpluses. It means that talk of a pension crisis is poppycock. To be sure, the rising flood of retiring baby-boomers means that deficits will eventually emerge. Raising revenues or lowering benefits to prevent them from happening is vitally important. These changes are better addressed sooner than later, but cries of ‘crisis’ are baseless.

The facts with respect to health care spending are also inconsistent with widely held perceptions. Health care spending has outpaced income growth for decades. That is why the share of gross domestic product devoted to health care has tripled in the last half century. But that spending juggernaut abruptly stopped in 2009. Health care spending is projected to claim a slightly smaller share of national output in 2013 than it did four years earlier.

Over the rest of this decade, the Medicare roles will swell, and total outlays will rise. But spending per enrollee is projected to rise a bit less rapidly than U.S. per capita income. The reason is the Affordable Care Act, health reform. Contrary to the assertions of those who sought its defeat and oppose its implementation, health reform—the Affordable Care Act—will directly slow the growth of health care spending, and it contains numerous pilots, experiments, and incentives that promise to slow the growth of spending still more. Caution is in order. Not all of these measures will work. Some may not be indefinitely sustainable. Spending slow-downs have occurred and proven temporary—and it could happen again. But right now, if you said that health care spending, in general, or Medicare spending per person is rising faster than national income, you would be in error.

The misinformation that stands behind the incorrect answers to these questions is doing the nation vast harm. Because of a false belief that spending is out of control Congress stands willing to let the sequester take effect, putting needless drag and the still-weak economic recovery. Because of a false belief that Americans are shouldering unusually high taxes, Congress is unwilling to close loopholes that would raise revenue without raising marginal tax rates. Because of a failure to recognize that Social Security is actually running cash flow surpluses and will do so for years, elected officials insist on enacting benefit cuts now as a precondition for dealing with nation’s immediate crisis, a weak economy and long-term unemployment. Because people assume that health care spending continues to grow unacceptably fast, they insist on the inevitability of a long-term fiscal crisis that may never occur and will in no case occur soon.

Meanwhile, the national economic blood-letting continues with an annual loss of nearly $1 trillion a year in output that would generate added revenues and put the long-term unemployed back to work. The mistaken beliefs about overall spending, taxes, Social Security, and health care spending that are simply not so are harming and will continue to harm the country most grievously.