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Home Publications Blogs Beat the Press Fun With Numbers: Looking for that Run Away Government Spending

Fun With Numbers: Looking for that Run Away Government Spending

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Thursday, 28 February 2013 14:53

I know it's rude to bring numbers to DC policy debates, but some of us uncouth types just can't control ourselves. Just for fun, I thought I would see what government spending measured as a share of GDP would look like if the economy had grown as had been projected before the 2008 collapse.

This is similar to taking the deficits as a share of potential GDP, but not exactly the same. Potential GDP is based on the Congressional Budget Office's (CBO) estimate of the economy's potential level of output. I am looking at the levels of GDP that CBO projected back in January of 2008 (Table 2-1), before it recognized the impact that the collapse of the housing bubble would have on the economy.

The estimate of potential GDP will differ for three reasons. First CBO may just be wrong about the economy's potential, it could be higher or lower than the level they estimate. Second, potential GDP may be lower as a result of economic developments over the last five years. For example, the large number of workers who have experienced long periods of unemployment may have effectively reduced the size of our potential labor force as some have lost skills. Third, CBO may just have been out to lunch when they made their projections in 2008.

In any case, this is still a useful exercise. It gives a chance to see the extent to which the ratio of spending to GDP has increased as a result of the fact that we are spending more than we had in 2007 relative to the size of the economy as opposed to the fact that the economy did not grow as much as we expected. Here's the picture:

gov-spending-gdp-2013

Source: CBO and author's calculations.

CBO projects that spending will be 22.8 percent of GDP in fiscal 2013 (this includes the effects of the sequester). That puts spending above the average of the last four decades, but below the peaks reached in the Reagan years. However, if the economy had grown at the rate that was projected in 2008, the current year's spending would be just 19.6 percent of GDP. That puts 2013 spending well below the 20.7 percent of GDP average for the years from 1973-2007. That is especially striking since we know that Medicare and Social Security have grown substantially as a share GDP due to the aging of the population.

So where is the runaway spending? Oh well, this is Washington. Let's get back to the sequester. 

Comments (4)Add Comment
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written by watermelonpunch, March 01, 2013 12:51
Now if you could put this together with charting projected vs. real Medicare prescription drug spending, you could get down with having some real kicks.
(And provide a sure fire way to give math phobics some terrifying nightmares! lol)
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written by Anitiderivative, March 01, 2013 4:18
"That is especially striking since we know that Medicare and Social Security have grown substantially as a share GDP due to the aging of the population."

Perhaps this is "striking" to a layman, but this expected as government spending on goods and services has been declining since the Korean War.
http://goo.gl/bnKNv
Oops, wrong graph
written by Anitiderivative, March 01, 2013 4:23
I meant to show the declining spending on goods and services as a percentage of gdp.

http://goo.gl/9ah88
...
written by Robert Waldmann, March 03, 2013 9:36
I think the title of the graph is misleading. The numbers seem to correspond to Federal Government Current Expenditures (says FRED) not to
total government expenditures which are higher and falling more sharply.

I promise I won't tell Paul Krugman that you let the 50 little Hoovers off the hook, but I do think there should be a "Federal" somewhere in the post if I am right.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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