LAWRENCE SUMMERS published an article recently in theFinancial Times asserting that U.S. federal spending will continue to grow both in real terms and as a share of the economy regardless of whether Barack Obama or Mitt Romney is elected in November. As one of the nation’s eminent economists and a former Treasury Secretary, Mr. Summers is someone whose judgments deserve careful attention. Readers may safely assume that his article reflects high-level thinking in Democratic circles in Washington. Nevertheless, his case is flawed on several counts.
Mr. Summers is certainly correct on one point: Pressure for more spending will continue to grow over the next decade. Baby Boomers are beginning to retire in large numbers, putting increased strain on Social Security and Medicare. Interest costs on public debt are certain to rise as a share of federal spending and GDP. The costs of goods and services purchased by government in health and education will grow more rapidly than those purchased in the private sector. At the same time, governments at all levels are running out of short-term gimmicks to cover or disguise their spending. Mr. Summers argues the problems are such that spending will grow and taxes will increase no matter which party controls the government.
In fact, the likely outcome is very nearly the reverse: Spending will have to be cut, and cut drastically from current trend lines. That is a near certainty. But when we will begin to address our spending problems is a vital question. The longer we wait, the deeper the fiscal hole we will dig for ourselves. On this point, it will matter a great deal which party wins this election.
Mr. Summers understates the true magnitude of the problem, in part because he misstates some facts about current levels of federal spending. For example, he writes that U.S. public debt (that is, debt owed to the public, rather than debt one part of the government owes to another) will reach 65 percent of GDP by the year 2020. It is not clear where he gets this figure. U.S. public debt now stands at about $10 trillion, out of a total debt of $16 trillion, while GDP in 2012 is expected to be about $15.5 trillion. Thus, publicly owed debt is already over 60 percent of GDP and is climbing by 10 percent or so every year. At these rates, publicly owed debt will probably exceed 100 percent of GDP long before the year 2020. Total debt, including IOUs the government has written to itself, already exceeds that figure.