Thomas Sargent and Cutting the deficit

The One Big Reason We Can’t Really Cut the Federal Deficit

Mar 21, 2014 • Economic Debates, Economic Growth, Economic History, Government, Health Care, Households, Labor, Lifestyle, Regulation, Thinking Economically • 271 Views    No Comments

It is tough to be a deficit hawk.

Budget news deficit xkcd

“Budget News” from xkcd

 

Rather than our typical spike in wartime spending, we have a peacetime deficit. (Please note that the federal deficit is just how much spending exceeds revenue during one year.):

CBO debt history

Debt History From the CBO

 

Spending for…

  • Social Security
  • Medicare
  • Medicaid
  • Children’s Health Insurance Program (CHIP)
  • ACA health insurance exchanges’ subsidies

…has become an increasingly large share of GDP. Cutting these big spending categories would affect well-being, be unpopular and perhaps contrary to American values.

Spending is a much larger percent of GDP for key categories.

From: CBO

 

And, the cuts would have to be relatively large:

Deficit cuts would be large

Deficit Cuts from CBO

 

More specifically, the…

  • Aging Baby Boomers
  • Health care costs per beneficiary rising faster than projected per capita GDP
  • Income assistance initiatives from Medicaid
  • Health insurance subsidies from the ACA

…are fueling the spending that is so tough to cut:

Reasons for Deficit Growth

From CBO

 

And so, as economists, we can say that the tradeoffs are the one big reason it is so tough to cut the deficit.

Sources and resources: Having become a fan of xkcd, again for today, I discovered a relevant “cartoon” for all of the facts, graphs, data from the Congressional Budget Office’s “2013 Long-Term Budget Outlook” report. At econlife, we last looked at the deficit here and here.

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