Former Treasury Secretary Larry Summers claimed at a Wednesday lunch that the “Republican vow to significantly reduce the size of government is a foolish pipe dream” due to “structural economic realities.”
What are these realities, according to Summers?
- An aging population will mean upward pressure on entitlement spending on unchanged policy.
- The rise in inequality requires government spending to “ameliorate” the consequences.
- Prices tend to rise relatively quickly in service sectors such as education and healthcare, necessitating more government spending.
- Rising national security threats and increased military spending by geopolitical foes will necessitate more U.S. military spending too.
Where to start?
Summers is right that, on unchanged policies, government spending would balloon due to aging.
The Congressional Budget Office projects spending on Social Security would rise from 4.9 to 6.3 percent over the next 30 years, whilst Medicare spending would nearly double from 3.1 percent of GDP to 6.1 percent. The impact of all that extra spending, even as non-Social Security and healthcare spending is projected to fall from 8.9 percent of GDP to 7.6 percent, is a growing budget deficit and accumulated debt. This would raise net debt interest payments further, such that by 2047 the U.S. budget deficit stood at (a completely unsustainable) 9.8 percent of GDP.
These long-term projections come with all the usual caveats. They use assumptions about the likely path of productivity growth in the economy, population growth, and the extent of labor force participation. Nevertheless, this analysis does highlight the scale of the contingent liabilities embedded in current policy.