A Simple Model for U.S. Spending Restraint


Tuesday March 31st, 2015   •   Posted by Craig Eyermann at 6:59am PST   •  

Last week, we suggested that the U.S. government could “rather painlessly” pay down the national debt if it adopted a policy where it restrained the growth rate of government spending to be less than the growth rate of the nation’s GDP.

Let’s take a closer look at how that might work in practice. Let’s start by looking at what would have happened to the growth of the U.S. government’s spending and national debt in all the years after World War 2 if it had restrained its spending to grow at an average annual rate of 5% per year, just slightly faster than the average combined rate of the nation’s population growth (1.2% per year) and inflation (3.6% per year) during that time.

Coincidentally, that combined rate is consistent with the growth rate of the nation’s economy during all those years!

Let’s throw an extra wrinkle in that approach as well – let’s connect the amount of money that the U.S. government would be allowed to spend to the actual amount of revenue it collects. And the way we’ll do that is to directly link the amount it spends to how much it actually collected two years earlier.

The reason why we would do that is a practical one – when the U.S. Congress is busy working on a budget for the next year, it doesn’t know exactly how much revenue the government is going to collect during the current year. But they most certainly do know how much was collected during the preceding fiscal year, two years earlier than the year for which it is working on the budget. And all we have to do to set the amount of money the U.S. government would be allowed to spend is to take that number and multiply it by 110% (100% for the amount of revenues from 2 years earlier than the year being budgeted, plus 5% to account for the current year, plus another 5% to get to the year being budgeted.)

Let’s see how that would work in terms of the actual performance of the U.S. economy and the growth of government revenues from 1946 to the present, and then on to the year 2020 with the amount of spending proposed by President Obama. Our first chart below shows those actual tax collections and the amount that would be spent following our simple system and compares it with the amount of money that the U.S. government actually spent over that time.

110-annual

What we find is that over most these years, the U.S. government would actually have run a small budget surplus each year. And interestingly, we see that there would a countercyclical benefit to the approach during periods of recession, where the U.S. government would be allowed to spend more money than it takes in when tax revenues fall during these periods, which it could apply to pay for the increased cost of things like unemployment benefits during the period of recession without requiring a special act of Congress to authorize more spending.

Our next chart compares how our simple approach for restraining the growth of government spending to be less than the average growth rate of the U.S. economy would have have affected the growth of the national debt, as measured by the accumulation of annual budget deficits or surpluses from 1946 to the present.

110-cumulative-deficits-debt

Here, we see that the actual level of spending the U.S. government had from 1946 to the present, and then on to the year 2020 would be responsible for adding at least $14.4 trillion to the U.S. national debt. By contrast, if spending had been restrained to an average growth rate of 5% per year, by 2020, the U.S. would instead have an accumulated surplus of $1 trillion. What’s more, we see that only in the four years following the recession of December 2007 to June 2009 would the U.S. have even added to its national debt at all before being able to pay it down and return to a net surplus.

Finally, just out of curiousity, we wondered what growth rate we would have to use with our approach to match the actual accumulated deficits recorded by the U.S. government since 1946. After a little bit of trial and error, we determined that spending would have to be increased at an average annual rate of 15.5% per year to accumulate the equivalent amount of deficits and debt.

What that result means is that the U.S. government has been consistently spending money at over three times the rate it can actually afford to spend since the end of World War 2.




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