It’s really very simple

Ross Perot is back–with charts. However, instead of funky flipcharts, he now has a series of cool, web-based, graphics at PerotCharts.com. But the message hasn’t changed: Government Spending is Not Sustainable and we have to DO SOMETHING NOW (subtext: cut entitlement programs).

Jeebus. I used to kind of believe this stuff. The message is similar to alarms sounded by respectable people like Pete Peterson, and David Walker at the GAO. Most of the data look right and its from reputable sources, but somewhere along the way they lose focus and end up drawing the wrong conclusion.

To show you what I mean, lets take a quick walk through the Perot Charts. Then I’ll explain why the conclusion is way way wrong. First up, the federal budget. As you can see there are trillions of dollars in taxes an spending….

Since “trillions of dollars” is meaningless to most people, the CBO usually expresses budget numbers as a percentage of the entire economy, or GDP. That’s the next chart…

So, that makes more sense, but it looks kinda bad. Tax collections have averaged 18.4% over the past 30 years and spending 20.9%. At this point I’d say it looks like a problem, but doesn’t look like much of a crisis. In fact, it looks the solution might be, shall we say, really very simple.

The gap between taxes and spending is only 2.5%, and if we don’t want to cut spending, we need to increase tax collections a few percentage points. Presto, problem solved.

Is raising taxes to that level a major problem? It doesn’t appear to be. In fact tax rates were at a level adequate to cover spending very recently (see late ’90s above). But maybe taxes in US at that level are an onerous burden that no one can be expected to bear. By way of comparison, let’s take a look at what’s happening in other countries. As it turns out, tax collections in the US are far below virtually all other advanced nations as a percent of GDP. Here’s a chart from the OECD (not provided at PerotCharts) comparing total tax collections for 30 countries

The US is in 26 out of 30–at 28%. The US collects far fewer taxes than comparable countries as a percent of GDP. As I say, I don’t see a crisis yet. So let’s proceed with the Perot charts. (note: if you are wondering why the US is 28% in this chart and 18% in the Perot chart—it’s because the Perot chart is looking at federal taxes only—the OECD chart is total taxes, including state, local, whatever. )

It all begins, it seems, with spending. Perot shows us the major categories of government spending…

…but one category, the mandatory programs, seem to be crowding out the discretionary ones…

Further, the mandatory programs are primarily programs for the elderly: Social Security and Medicare. The population is aging…

…causing the mandatory programs to skyrocket…

… then, because of the enormous growth of mandatory programs, the government budget explodes! By 2049 the federal government will be spending 55% of GDP!!

Looks bad. But let’s focus on one statement Perot makes about one of the scary charts above:

Government spending for the big three entitlement programs, as a percentage of GDP, will triple in 70 years, primarily as a result of projected increases in healthcare costs.

Exactly–its healthcare costs. Although the focus is on “entitlements” including Social Security, and on government spending in general, this is a problem caused by healthcare costs. In fact a CBO report that Perot doesn’t use, makes exactly this point. Healthcare costs are expanding faster than economic growth. That’s unsustainable. It’s only a government problem because government pays for a lot of healthcare (about 50%; employers and individuals pay the other 50%). Costs are accelerating faster than economic growth in both sectors.

So we could solve the federal budget problem by having the government get completely out of the healthcare business and have employers and individuals cover all the costs. Unfortunately that would have zero effect on the problem. The only real effect would be to change the labels on the chart above. Instead of taxes eating up a huge portion of GDP, it would be health insurance premiums eating up a huge portion of GDP. Big help.

Focusing on government spending misses the point. Even worse, if we look at how other countries address this problem, and spend far less money on healthcare than we do, we find that they’ve done it by doing exactly the opposite of the solution implied by the Perot Charts. They’ve expanded entitlement programs long ago to include national healthcare. As a result they are now spending 3-8% less of their GDP on healthcare.

I kind of like Perot’s bulldog attitude and focus on stats, but this is one dog that needs to start barking up the right tree.

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1 Comment

Filed under economics, healthcare finance, social insurance

One response to “It’s really very simple

  1. Pingback: Accountant vs. Tsunami « dwightinsight

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