Growth Rates and New Baselines

As taxpayers, we should carefully look at spending programs that had very high growth rates over the past few years.  Many programs, particularly in social assistance, are designed to ramp up during bad times to help smooth out income shocks for people.  Unemployment benefits are a prime example.  Therefore, we should not be surprised to see increased inflation-adjusted spending levels from 2008-2013 in certain programs.

The reduction in the nominal unemployment rate is often cited as evidence the economy is improving.  However, if this is the case, government spending that is counter-cyclical to the economy should significantly decline over the next few years as the economy improves.

By 2018, these programs should have a budget that is 20-25% higher than 2008 levels due to inflation adjustments.  Between 2008 and 2013, the Consumer Price Index increased by 8.2%, and an estimated CPI increase of 11-15% between 2013 and 2018 will produce that overall 20-25% increase over ten years.

However, opening up this OMB spreadsheet (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist03z2.xls) reveals a different story for many agencies (not limited to counter-cyclical spending), vastly exceeding 20-25% inflation:

Expenditure	Est. 2008-18 Increase
Federal Employee Pensions	40%
Food Stamps	67%
General Government	82%
International Affairs (non-Defense)	80%
Medicaid	113%
Medicare	57%
Social Security	76%
Transportation	44%
Veterans Benefits and Services	102%

Displaying these line items is not an indictment of the programs; rather, it is a mathematics-based conversation starter.  Some liberals and conservatives alike would shun at the mere mention of reducing the growth rate of some of these entities.  “Cutting” is the operative buzzword used to scare away attempts to reduce growth rates.

From an economic perspective, however, this level of increase over ten years—far outpacing inflation—is problematic for many reasons.  Remember, this time series is between 2008 and 2018, which is when the economy should return to nearly full employment and yield an apples-to-apples comparison.

Practically speaking, it is very difficult in Washington to reduce the spending growth of many programs, even when it is clearly warranted.  Consequently, these elevated levels become new baselines that all future spending is based upon.  This feature is crucial, because it essentially guarantees higher spending levels in perpetuity that exceed the economy’s ability to pay for them.

Whether or not you pay much attention to politics, understanding these economic concepts will empower us to thoughtfully analyze the budget and immediately recognize the shallowness of what many politicians and pundits claim about “cuts.”