Government Spending Grows = The Economy Slows

Presented by

Rich Sokol

September 5, 2010

Purpose

• To explain in a manner the average person can understand:– That government spending has been increasing (even

adjusted for population growth and inflation)– This is causing our economic growth to slow (thus

less jobs and less wealth created)– The growth is not due to National Defense Spending– These trends have been going on for 40 years– AND THE TREND IS GETTING WORSE!

What is GDP?

• Gross Domestic Product (“GDP”) is defined as the total market value of all the output produced in a nation.

• GDP per capita (that is, output divided by number of people) is often used as an indicator of standard of living in an economy. The standard of living tends to increase when GDP per capita increases.

• Economists use GDP per capita to compare our country to others, and to measure how our wealth is changing over time.

• The higher GDP per capita is, the wealthier we are.• SO HOW HAVE WE BEEN DOING?

GDP per US resident adjusted for inflation

1949 $13,945

1959 $16,961

1969 $23,293

1979 $29,083

1989 $35,612

1999 $42,797

2009 $47,488

• THE AMERICAN DREAM We want each generation to be wealthier than the one before

• IS IT WORKING? YES! It has held true for the last 60 years

• Today, inflation adjusted, we are 3.4x wealthier than our grandparents in 1949

GDP per US resident adjusted for inflation :

growth by decade• But the increases in our standard

of living are slowing

• Each decade is experiencing less growth in wealth than the decade before

• This is despite tremendous structural positives: technological advances (the pc and internet), emergence of the US as sole superpower after winning the cold war, and no world wars or conflicts fought on our soil. We should be booming!

• What is going on???

1960s 37%

1970s 25%

1980s 22%

1990s 20%

2000s 11%

2010s ??

What About Other Measures of Wealth?

Disposable Income per US residentadjusted for inflation: growth by decade

• “Disposable Income” is personal income after paying taxes

• It’s the money in your pocket

• SAME TREND AS GDP

• GROWING BUT SLOWING

1960s 37%

1970s 26%

1980s 26%

1990s 20%

2000s 15%

2010s ??

What’s The Culprit?

Total Government Spending per US resident, adjusted for inflation

• Over the last 40 years, we’ve had Republican Presidents and Democratic Presidents, liberals and conservatives, busts and booms, war and peace.

• The only constant has been a steady and relentless climb in government spending. Even after adjusting for growth in population and inflation.

• As the increases in our nation’s wealth have been slowing, government spending has been increasing!

• The government spends $68K per year for the average family of 4. Do you feel your family is getting its money’s worth?

• Obama basically wants to DOUBLE the size of government relative to Reagan, even after inflation.

1969 $6,874

1979 $8,585

1989 $11,208

1999 $12,415

2009 $17,144

2019 est. $20,495

Note: Total Government Spending = Federal + State + Local

Total Government Spending per US resident, adjusted for inflation: The Future

• AND THE FUTURE IS WORSE!

• By 2059, the government will spend more than $200K per year on the average family of 4!

• This is nuts!• These numbers are the

Congressional Budget Office’s June 2010 projections based on current law with “changes that are widely expected to occur”

2009 $17,144

2019 $20,495

2029 $26,037

2039 $32,909

2049 $41,313

2059 $52,276

Is the spending increase due to National Defense? Federal Defense Spending as a % of GDP and as a % of

total federal spending

• We are devoting LESS, not more, of our national resources to defense

• Yes, the Iraq and Afghan wars were/are expensive, but it’s not the chief cause of our spending addiction

• Big increases in spending have been in Medicare / Medicaid, Social Security, and other “human resource” programs

DEFENSE

% of GDP

DEFENSE% of spending

1950s 10.5% 59.5%

1960s 8.7% 46.4%

1970s 5.5% 27.4%

1980s 5.8% 26.2%

1990s 3.8% 18.8%

2000s 3.8% 19.0%

HOW ARE WE PAYING FOR ALL THIS SPENDING ?

United States DebtHeld By Public: Inflation Adjusted

• In our country’s first 200 years (1776-1976), we accumulated $1.5T of debt (inflation adjusted)

• In 2010 alone, we will add about $1.5T of debt!

• The average American family of four’s share of the debt is over $115K. Are you ready to pay up?

• “Held By Public” excludes debt held by one government branch owed to another government branch (mostly Social Security IOUs). As of 9/2/2010 this is $4.5T, so total US debt = $13.4T

• Does not include State + Local Debt = $2.6T as of 2008

Inflation Adjusted ($s trillion)

Per US resident

1979 $1.7T $7,445

1989 $3.6T $14,449

1999 $4.7T $16,882

2009 $7.7T $25,185

9/2/10 $8.9T $28,794

United States DebtFuture Debt Levels

• With trillion dollar deficits per year as far as the eye can see, debt will explode

• Driving forces are Medicare, Medicaid and Interest on the Debt

• Medicare and Medicaid increases result from an aging population and increases in health care costs

• These numbers are the Congressional Budget Office’s June 2010 projections based on current law with “changes that are widely expected to occur”

Inflation adjusted

($s T)

Per US resident

9/2/2010 $8.9T $28,794

2019 $16.0T $47,441

2029 $31.7T $84,964

2039 $63.3T $153,474

2049 $116.2T $254,920

2059 $200.3T $397,808

US Debt as a % of GDP• Soon, the amount we owe will be

a bigger number than our country’s annual output

• Greece’s economy is on the precipice of imploding. Greece statistics:

Debt/GDP = 120%Unemployment=12% (May 2010

expected to reach 20% with austerity budget)10 year interest rate =11.4%

• CBO projects the US will reach Debt/GDP = 120% in 2027

• Europe and the IMF (to which the US contributes) bailed out Greece

• Who will be left (or is big enough) to bail us out?

1979 26%

1989 41%

1999 39%

2009 53%

9/2/2010 61%

2019 84%

2029 138%

2039 223%

2049 332%

2059 468%

Don’t Worry

• The United States will never reach these scary levels of debt

• Our economy will implode well before this happens

Now Worry

• “In fact, CBO’s projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy.”– June 2010

What does the future hold?

• Baby boomers are starting to retire• Spending on Medicare, Medicaid and Social

Security is about to explode• Government spending is likely to accelerate. On

our current path, growth over the next 40 years will dwarf the growth of the past 40 years.

• REMEMBER: THE LAST 40 YEARS OF DATA SHOWSHIGHER GOVERNMENT SPENDING = SLOWER GROWTH IN JOBS AND INCOME

Spending vs Taxes

• Tax Policy is important• But Spending Policy is even more critical!

– When the government spends $s, it gets those $s from taxes or from borrowings

• Either way, the taxpayer ends up paying!– Now, in the form of taxes– Later, in the form of interest and principal on the

borrowed funds

• Spending determines how much the taxpayer ultimately pays, not current tax policy!

CONCLUSIONS• The key to increasing prosperity is to shrink the size of government• The next generation may be the first in US history to have a lower

standard of living than the current generation• Our country has made conflicting promises:

– To current citizens, we have promised Medicare, Medicaid and Social Security

– To our children and grandchildren, we have promised a healthy country– WE CANNOT AFFORD TO KEEP BOTH SETS OF PROMISES– WE WILL HAVE TO BREAK OUR PROMISE TO ONE GROUP

• Government leaders need to think about the long term health of the economy– And not how to get the most votes for the next election!

• CUT GOVERNMENT SPENDING!!!

WHAT FUTURE ARE WE LEAVING FOR OUR KIDS?

Sources and Notes• All source data for years 2009 and before, other than population, from “Budget of the United

States Government, Fiscal Year 2010”, Office of Management and Budget, www.whitehouse.gov/omb/budget. The years are fiscal years (Oct 1-Sep 30) not calendar years.

• Federal data for 2010 and forward from The Congressional Budget Office, “The Long Term Budget Outlook” June 2010, www.cbo.gov/doc.cfm?index=11579

– Projections are from the “Alternative Fiscal Scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period.”

– Did not use the “Extended Baseline Scenario” which “adheres closely to current law.” This projects massive increases in taxation and cuts in non-health care spending

• Future (post 2009) State and local spending data are author’s estimate. Author assumed future state and local spending grows 4.0% per year (vs historical average of 8.1%).

• 9/2/2010 debt levels from US Treasury which reports daily debt levels at www.treasurydirect.gov• All inflation-adjusted dollar amounts use the year 2010 as the base year. For years prior to 2010,

the inflation index used is the GDP deflator, chain-linked 2009 prices. For 2010 and forward, CBO’s June 2010 estimate of future yearly CPI used.

• Population statistics from US Census Bureau• Rich Sokol, author, graduated summa cum laude from Yale University with a Degree with

Distinction in Economics.