Why Romney (and Obama) Won't be Able to Shrink the Federal Government

[courseofhistory]

Does Romney know this? Apparently not!

...Unfortunately, this is unlikely to be achieved. For structural reasons, even preserving the amount of government functions that predated the financial crisis will require substantial increases in the share of the U.S. economy devoted to the public sector.

First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare, Medicaid and some smaller programs about 32 percent of the federal budget, or about 7.7 percent of gross domestic product, is devoted to supporting those over 65. The ratio of this age group to those of working age will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation. If no other adjustments are made, this implies an increase in federal spending of 5.6 percentage points of GDP. As Americans’ health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. That would, however, be unlikely to counteract the expected 34 percent increase in the share of the population over the next generation who will be within 15 years of estimated life expectancy.

Second, the accumulation of more debt and a return to normal interest rates will raise the share of federal spending devoted to interest payments. In 2007, before the financial crisis, federal debt held by the public was equivalent to 36.3 percent of GDP. On a very optimistic view, where recommendations such as those of the Simpson-Bowles commission are implemented, net debt held by the public will nearly double, to 65 percent of GDP, by 2020. This implies that the federal government’s outlays to service its debt will rise from 1.7 percent of GDP in 2007 to 3.2 percent of GDP in 2020.

Third, increases in the price of what the federal government buys relative to what the private sector buys will inevitably raise the cost of state involvement in the economy. Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing, and more than a hundredfold relative to the price of televisions. Similarly, the complexity, and hence the cost, of everything from scientific research to regulating banks rises faster than overall inflation. These shifts reflect long-running trends in globalization and technology. If government is to continue providing the same level of these services, government spending as a share of the economy has to rise, by at least 3 percent of GDP...

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