New Data Show the Debt Problem Is Spending (not Taxes) and Obamacare Worsens the Problem

Everyone now seems to agree that the exploding federal debt is a serious problem that must be addressed. But how? The following two charts provide some data to help answer that question. I put the charts together using budget data from CBO’s new Long Term Budget Outlook released on June 30. They take account of the budget effect of latest legislation—including the Obamacare bill.

The first chart presents the outlook for spending (red line) and revenue (blue line) as a share of GDP using CBO’s “alternative scenario,” which assumes that President Obama’s tax increase proposal is passed, including increasing the two top income tax rates. The deficit is the difference between the red and blue lines. Thus the chart clearly demonstrates that the deficit is exploding because government spending is exploding.

The chart also shows (green line) what would happen to tax revenue if tax rates stay at their current level and are not increased as President Obama has proposed. Taxes would average about 18.5 percent of GDP compared with 19.3 percent for CBO’s estimate under the Obama tax rate increase. According to the chart the Obama tax increase would not have a material effect on the very large deficit (the chart even overstates the effect because it assumes static budget scoring). Again the problem is spending growth, not taxes. To me this chart implies that it is far better to leave tax rates where they are and focus on a plan to end the explosive spending growth, especially in a weak economic environment where higher marginal tax rates can severely reduce economic growth and employment.

The second chart looks at the reasons for the explosive spending. It divides non-interest spending into three parts: (1) social security, (2) health care (Medicaid, Medicare, and Obamacare) and (3) everything else. Item 2—spending on health care—is clearly the most important source of the spending explosion. Remember that these data came out after Obamacare was passed. Thus, Obamacare does not address the explosive health care spending problem, which will come as no surprise to its critics, but is clearly contrary to the claims of those who supported it. Moreover, to the extent that Obamacare slowed growth in Medicare it more than offset this with new entitlements, making controlling health care spending even more difficult now. The data are clear: In order to control government spending, you have to start over on health care reform. Whether you call that “repeal and replace” or “repeal and reduce (the deficit)” the message is the same.

In sum, these new budget data show three things: First, the deficit is exploding because government spending is exploding. Second, the tax increase proposed by President Obama would not have a material effect on the exploding deficit. Third, we need a new approach to health care reform if we are to control government spending and wind down the deficit.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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