PLANK DECEMBER 28, 2012
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Republicans want to reduce the size of the federal government, and they won’t take no for an answer. “I just want to shrink it down to the size where we can drown it in the bathtub,” Grover Norquist famously declared. And in negotiations over the fiscal cliff, they have insisted on cutting spending rather than raising taxes. “The President wants to pretend that spending isn’t the problem,” House Speaker John Boehner has complained.
Democrats, for their part, have responded defensively. House Minority Leader Nancy Pelosi warned that the Republicans would “cut out the prospects for job creation.” But other Democrats, including former Obama administration officials Austan Goolsbee and Peter Orzag have come out for “entitlement reform” to reduce government spending. And in his compromise offer to Boehner, Obama proposed reducing Social Security benefits over time by changing the way they were to be adjusted for cost of living increases.
That’s politics, of course, but there are a set of unpleasant truths lurking behind this debate over the budget and taxes that policy-makers in Washington need to acknowledge. First, that in order to meet public demands for affordable health care, quality public education, and retirement insurance, government at all levels will need to grow and take up a larger percentage of the nation’s GDP. Second, any significant cuts to these programs’ funding will undermine their effectiveness. And third, the only way to maintain these programs is by raising taxes on income and wealth--and well beyond, the kind of increases that the Obama administration has proposed in negotiations over the fiscal cliff.
The government has grown dramatically over the last century. The federal government has gone from 2.47 percent of GDP in 1913 to 24.33 percent in 2012. Total federal, state, and local spending has gone from 8.1 percent in 1913 to 39.94 percent today. Military spending shot up during World Wars I and II, the Korean War, the Vietnam War, and Ronald Reagan’s military buildup in the 1980s, but it has remained between 4 and 6 percent of GDP over the last two decades. The largest federal, state, and local expenditures – which account for more of the growth over the last century -- are for pensions, health care, and education.
These programs exist, and have grown, because the public overwhelmingly supports them. Opposition to them is largely confined to a noisy faction of Ayn Rand disciples and business groups that view public expenditures, which they describe as “entitlements,” as a subtraction from private wealth. As my colleage Noam Scheiber notes, it’s true that many voters are wary of “big government” in the abstract, but a politician risks his career by proposing to cut Medicare or Social Security or to abolish the Department of Education. Government developed and expanded these programs, because private companies could not make a profit providing these services for all senior citizens or guaranteeing education to all children. And that wasn’t because the companies were insufficiently ingenious. It was because of the nature of these programs. That’s a point that economist William Baumol has made – most recently, in a book entitled The Cost Disease -- and it’s worth reiterating during the current debate over the size of government.
One needs to distinguish between productive and stagnant sectors of goods and service production. In the productive sectors, which include much of manufacturing, productivity has risen sharply over the last century. In these industries, fewer workers can now produce far more goods. But in the stagnant sectors, which include much of health care and education and also Baumol’s favorite example, the performing arts, productivity has risen much more slowly or not all. It takes the same number of musicians the same time to play a Beethoven String Quartet. And any attempt to increase productivity in these sectors – by, say, getting teachers to double their class sizes, or replacing the clerks who answer inquiries about Social Security with automated call centers – can degrade the quality of the service.
In the private sector, the average (though not necessarily the median) wage and salary has kept pace with productivity. From 1954 to 2005, real compensation grew 2.02 percent a year and productivity at 1.92 percent. That means that even though employers may be paying a larger total in wage and salary, the costs of producing an individual good or service has not risen. As a result, there is no impetus to raise prices on that good or service in order to meet new costs.
But the situation in the stagnant services is different. Professionals, who are well represented in those services, are as highly trained, and their services are as sought after, as professionals in the more productive services. As a result, their wages or salaries have kept pretty much in line with those in comparable productive sectors. But because they don’t annually produce a larger number of brilliant students or healthy patients, an increase in their income is not neutralized by an increase in productivity. Instead, the costs of production rise in these services, putting upward pressure on prices. Tuitions at public universities or the price of an appendectomy rises.
Viewed as a whole, the society can afford to pay for these stagnant services. High rates of productivity in the private sector lower the prices of many goods, balancing out the rise in prices from the stagnant services. And average wage and salary increases match the overall prices of good and services. But those workers who make less than the average wage are often not in a position to afford health care, private pensions, or university education for their children. And that is particularly true in our society, where the median income of non-supervisory wage workers has not kept up with productivity, and where, as my colleague Tim Noah has written, the rise in income has been disproportionately concentrated at the top.
If the stagnant services were forced to operate entirely within the private market, then quality health care or education would only be available to the upper and upper-middle classes. No one else could afford it. If these industries tried to provide these services at a cost that was affordable to everyone, they would go out of business. In order to provide these services for everyone, they have to be subsidized by government. And because wages and salaries in these services increase faster than productivity, the costs of providing these services are constantly rising. Baumol estimates that by 2015, health care expenditures will take up 60 percent of the country’s GDP.
That means that government subsidies to these industries will constantly grow and that local, state, and federal expenditures are likely to take up a growing percentage of GDP. Over the next decade, in response to Obama’s healthcare program, and, perhaps to programs making college more affordable to everyone, it will probably rise dramatically again during this decade. But even without Obama’s program, it would rise because of the nature of these services, which are at once highly valued by society, but not amenable to dramatic increases in productivity that might lower their costs.
None of this is argument against rooting out waste, fraud and abuse in the delivery of services. Or automating those services in areas where it won’t threaten quality. Nor is it an argument for creating larger government deficits. It’s quite possible, as the United States demonstrated in the late 1990s, for government to provide these services and balance the federal budget. But to fund these programs, governments will have to extract a share of income from those who are able to afford them and use the revenues to make the services available for everyone. As it stands now, we have a top-heavy distribution of income that our tax code accommodates and reinforces rather than attempts to correct.
The alternative to paying for the rising costs of these services is not to provide the services, or to provide a drastically inferior version of them for the vulnerable--run-down clinics without x-ray machines or doctors, schools staffed by listless teachers who are barely literate, pensions that plunge the aged into poverty. The Republicans and conservatives who talk about shrinking government don’t say this would be the outcome – instead they crow about computers in inner city schools – but it’s exactly what would happen if they get their way.
11 comments
Ugh. The productive/stagnant dichotomy is an archaic Marxist distinction of no use whatsoever. In this case, it serves to obscure almost every relevant issue. GDP per capita rises, and that necessarily implies a greater output per labor hour. Else, it doesn't rise. In turn, this is achieved by changes in technique that reduce labor input for the output, generally by the substitution of capital for labor. Rather obviously, this has less application to pure services, although there are many ways that technology does in fact improve the delivery of services. So what? None of that is the reason why income is unevenly distributed. None of it implies that we cannot afford our consumption of services. We have public goods both for reasons of equity, distributing wealth other than in the manner allocated by the market, and for reasons of efficiency, certain goods have large positive externalities -- education especially -- and would be under-consumed if they were not subsidized. This still has nothing to do with so-called productive and stagnant sectors. If the economy produces it, we can by definition afford it as we are by definition devoting a share of productive resources to producing it. That includes all services. Whether individuals can afford the basket of goods we want them to have is rather a different matter, but nothing to do with so-called productive and stagnant sectors. The shortfall in government revenues is purely political, the result of political insistence on generating excess income in the private sector -- that is income that exceeds the aggregate consumption and real investment of the private sector -- particularly for the wealthy as they are the only ones who have excess income. Start over, skip the Marxist analysis.
- roidubouloi
December 31, 2012 at 12:42am
Looks like a typo that the percent of GDP in 2015 will be 60 - but more like an indefensible 18%. That's almost twice the average percent of other industrialized countries that also have better health care outcomes. Let's all be in one risk pool to pay for our premiums. We'd be paying less overall, could better coordinate care, and have better outcomes; and lower the percent of GDP for health care. The heresy is we would be paying through the taxation system - a much better way, actually, to pay our premiums.
- bsemple
December 31, 2012 at 1:53am
The optimal rate on the Laffer curve (which is supposed to measure maximum revenue based on the theory that high taxes discourage tax revenue,) is 70% (According to the The New Palgrave Dictionary of Economics, that is the the consensus among academicians). We once had that top rate (and higher) with a much smaller government. I think we should go back to arguing that the earth is flat because if you look out the window, it's flat.
- Nusholtz
December 31, 2012 at 8:43am
The only real priority in our economy should be creating jobs, not raising taxes or lowering the deficit. Both the Democrats and the Republicans are off base here. Republicans don't want a single new job created while Obama is president. That's why they keep laughing at his jobs bills. And Democrats won't go directly to the people and tell them that the only way for them to be employed in the future is to have the government hire private contractors, who then hire new employees. Free-enterprise capitalism doesn't work anymore. Most companies care only about their investors. That's why they have over $2 trillion in the bank. The only sector where we'll have any liquidity from now on is the financial one, and that's run by a bunch of crooks. The TNR piece about J.P. Morgan, one of the "good guy" bankers, cornering the copper market is just more proof of that. How fitting that America's only sustainable product now is money--dirty money.
- magboy47.
December 31, 2012 at 12:08pm
Judis writes: "These programs exist, and have grown, because the public overwhelmingly supports them." The public supports them because so far they have been getting them at a heavily discounted rate. They pay about $0.60 and get $1 in services. Hell ya that's a sweet deal. if the public is asked to pay full freight, they will reject these programs. The tag of this article should be "SeattleEng has been right all along, and now I understand that....any how my journalism degree and ideology has let me down...again" 1) The tax cuts on the middle class enacted by Bush were substantial. When the left claimed they were all going to to the rich, they were lying. 2) The middle class in the US pays very little compared to their EU counterparts in terms of taxes. With Obamacare, we are now offering social services on par with the EU. Why are our middle class tax rates not approaching the 50% the middle class earner pays in the EU? 3) The taxes on the wealthy won't come close to covering the tab. OK, so we raise taxes on the wealthy and we're still over a $1T short. Now what? Judis, a belated welcome to the party. Shame it took so long to sink in. But at least it did sink in. Judis writes: "And that is particularly true in our society, where the median income of non-supervisory wage workers has not kept up with productivity, and where, as my colleague Tim Noah has written, the rise in income has been disproportionately concentrated at the top." Wages decoupled form GDP long ago, because concentrated parts of the market have been showing enormous productivity gains. If an employee at Intel, Microsoft or Google expected their wage to track their employers output over the last 20 years, then most all employees at these companies would be paid $10M a year. Of course that isn't the case. And yet, much of our market HAS enjoyed compounded high growth for a long. Thus, as of recent (~20-30 years now) wages in aggregate have decoupled from GDP. The bigger question is: If wages have decoupled from GDP, why does Gov still grow faster than GDP? The government is NOT one of these sectors that shows huge benefit from automation. The gov is the perfect example of a sick organism that requires twice as many people to do twice as much work. Gov size should track wages. Not GDP. Otherwise, the end game is clear: 100% of wages soon go to feed gov.
- seattleeng
December 31, 2012 at 1:04pm
"Otherwise, the end game is clear: 100% of wages soon go to feed gov." The above is the statement of a fanatic. "The tag of this article should be "SeattleEng has been right all along, and now I understand that....any how my journalism degree and ideology has let me down...again." The above is the statement of a megalomaniac.
- magboy47.
December 31, 2012 at 7:32pm
More seattle bullshit. Until recently, there was a surplus in the so-called "middle-class entitlements." That means that more was paid in than paid out. Yet the public still supported them. As for seattle's latest little fable of misguided libertarian nonsense economics, the fact that increases in productivity are not uniform across sectors has always been the case. Always. That cannot be the explanation for why income gains are not spread across sectors as, according to the free-market fundamentalists, the market should spread the gains by attracting more labor to high-wage sectors and reducing the labor available to low-wage sectors. The libertarians and the Marxists are two sides of the same coin, equally unmoored from economic reality and equally able to substitute the fantasy of theory for observable fact. The non-military, non-defense portion of government has shrunk as a percentage of GDP since 2000 while the military has doubled. The only things out of control are the military and medical costs, but rightwing economic wingnuts are the chief obstacles to an effective solution to either. And needless to say, they spew copious lies to that end.
- roidubouloi
December 31, 2012 at 8:12pm
1. I'm not aware of anyone who claimed that the Bush tax cuts were "all going to the rich". There is a big difference between "all" and "disproportionately" which is the normal criticism. And it refers to the impact on the individual as "the rich" compromise a small part of our population so it's not hard to see how a small cut for many people ends up costing more than big cuts for a small number of people. 2. The PPACA is anything like the European social welfare state? That's honestly news to me. I'm not even going to bother with the only-tax-the-rich strawman, but when the first two points for your argument are unmoored from reality, it doesn't bode well for the rest of the argument. A bit like the rather complex yet utterly flawed argument that Obama "said" he wasn't proud of the US. Sans any supporting quote for some reason.
- Nari224
January 1, 2013 at 8:53am
Roid writes: "The non-military, non-defense portion of government has shrunk as a percentage of GDP since 2000 while the military has doubled. The only things out of control are the military and medical costs, but rightwing economic wingnuts are the chief obstacles to an effective solution to either." Education in 2000: 5.45% of GDP Education in 2012: 5.68% You were wrong. It has grown (albeit modestly) Welfar in 2000: 2.95% of GDP Welfare in 2012: 4.47% Wrong again. It has grown substantially. Military spending in 2000: 3.61% of GDP Military spending in 2012: 5.79% Wrong again. You claimed it doubled. Not even close. 60% growth. You need to start with reasonable and truthful numbers before you attempt to make a case.
- seattleeng
January 2, 2013 at 11:15am
Nari writes: "1. I'm not aware of anyone who claimed that the Bush tax cuts were "all going to the rich"." To claim now that the media and dems routinely noted the sizable tax cut provided by Bush to middle class families in the last decade is a lie. Nothing less. Pelosi's words at various times on the Bush tax cuts: "Bush tax cuts for the super-rich", "taking food out of the mouths of children to give tax cuts to America's wealthiest," and "tax dollars paid by middle-class Americans to pay for tax breaks for millionaires" In 2008, Reid said [the bush economy was ] "Built on a foundation for eight years that basically just value[s] tax cuts for the very wealthiest." Make no mistake: While Bush was in office, EVERYONE believed that Bush cuts didn't help the middle class at all. That lie was propagated by the media and and dems. Now you belatedly learn otherwise. If you want to convince me otherwise, find some mention of it in the press that showed just how big the cuts were for middle class Americans and glowingly attributed it to Bush. I won't hold my breath. Nari224 writes: "2. The PPACA is anything like the European social welfare state? That's honestly news to me." Tell me, with ACA what do the Europeans have from their health care that we don't?
- seattleeng
January 2, 2013 at 11:31am
Yuval Levin at NRO adds some interesting analysis too: "This deal is projected to yield $620 billion in revenue over a decade — increasing projected federal revenue by about 1.7 percent over that time. And that’s about it. The Democrats have made the Bush tax rates permanent for 98 percent of the public, which Republicans couldn’t even do when they controlled both houses of Congress and the presidency. " --- This is astounding: 1.7% more revenue. That is it. That is the change in the cracks of the couch. All this rattle and hum over 1.7% more revenue???? And now, in order to keep spending at current levels, dems must go in an EXPLICITLY raise taxes on the middle class. That is, they must go before the people AND TELL THEM THEY WANT TO RAISE THEIR TAXES to get this thing balanced out. PS. We pay more in INTEREST on the debt each year than these new tax increases generate. Think about that. And if rates go up a bit, the money spent to service the debt explodes. Some round numbers: The 4th quintile of earners earn on average $85K. They are responsible for 14% of all individual income tax revenue (not including SS and medicare and corp taxes) There are about 20M households in this group. If we run a $1T deficit, then this means 20M households must cover $140B in deficit spending IF we want to balance. This means for an $85K earner, their taxes must go up $7000 to cover their share and balance the budget. If you ask an $85K earner if he's willing to pay an extra $7000--almost 10% of his paycheck--to get the government he currently has and balance the budget, will he vote yes? And this is on top of his new health care requirement spending! The days of the $85K earner buying a low-cost high deductible policy are gone. He's now required to buy a $12K annual gold-plated policy with ZERO gov assistance. In other words, under a dem president, the $85K earner now has an extra $17K in expenses ($7K in taxes and $10K in health care requirements) that he didn't have to spend before. And he gets nothing to show for it. This is so awesome.
- seattleeng
January 2, 2013 at 12:42pm