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US Government Spending

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By Dean Baker

  1. How much is $2 trillion?

Okay, it is more money than even Bill Gates, Elon Musk, and Jeff Bezos have, put together. That probably still doesn’t give people too much information, since most people don’t have much familiarity with these folks fortunes. But it might be helpful if the media made some effort to put the proposed spending in President Biden’s infrastructure package in a context that would make it meaningful.

The spending is supposed to take place over eight years, which means that it would be equal to just over 0.8 percent of projected GDP over this period. At $250 billion a year, it comes to about $750 per person each year over this period. It is less than 40 percent of what we are projected to spend on prescription drugs over this period and less than half of the higher prices that we will be paying as a result of government-granted patent and related monopolies. (For some reason, the money transferred to the drug companies and other beneficiaries of these government-granted monopolies never gets called “big government.”)

Anyhow, instead of reporting $2 trillion as some big scary number, often not even telling people the time period involved, it would be helpful if news outlets tried to put the number in contexts that would make it meaningful to their readers. We get that reporting big numbers is a cool fraternity ritual among budget reporters, but making these numbers meaningful is actually supposed to be their job.

  1. Putting the debt in context

President Joe Biden’s recovery and jobs plans have led to considerable alarm over the resulting increases in the deficit and debt. Most of these concerns are misplaced.

The issue of whether a deficit is too large depends entirely on whether it causes us to push the economy too far, leading to inflation. The deficit for last year was $3.1 trillion, which was equal to 15.2% of GDP. This was by far the largest deficit, relative to the size of the economy, since World War II.

Yet, the inflation rate actually slowed in 2020, as the pandemic related shutdowns created an enormous gap in demand in the economy. It would be difficult to find any major sector of the economy that was operating near its capacity last year, and therefore raising prices.

The question going forward is whether President Biden’s spending proposals, coupled with his tax increases, are likely to push the economy so far that it will not be able to meet the demand created. That is not impossible, but it does seem unlikely. We have not seen a serious problem with demand generated inflation in more than four decades.

The other side is the burden created by the debt. There is huge confusion on this point, as people often get scared by politicians throwing around “trillions” of dollars. The numbers are huge, but so is our economy.

The latest projections from the nonpartisan Congressional Budget Office, which include the effects of President Biden’s recovery plan, but not his investment and jobs proposal, show the interest burden of the debt being 2.4% of GDP in 2031. By comparison, the interest burden was well over 3.0% of GDP in the early and mid-1990s. The idea that this burden will somehow bankrupt our kids is nonsense.

Furthermore, the people who complain about the debt almost never comment on the other ways that we create burdens for future generations. Most obviously, government-granted patent and copyright monopolies are an enormous burden. These monopolies raise the price of prescription drugs, medical equipment, computer software and other protected items by many thousand percent above their free market price. The burden in the case of prescription drugs alone is close to 2.0% of GDP, and rising rapidly.

If we want to talk seriously about burdens facing our children, the government’s debt is a tiny part of the picture. We will hand down to them a whole economy and society, including the natural environment. If we paid off the national debt, but left an economy in ruins and a devastated environment, we will not have done our children any favours.

From: p.12 of WEA Commentaries 11(1), April 2021

Download WEA commentaries Volume 11, Issue No. 1, April 2021 ›

3 responses

  • Dr Darin Gunesekera says:

    I did not get to know from news coverage that the 2 Trillion was over 8 years !!


    Dean Baker should have heard of Modern Monetary Theory, which i many decades old.. That says that governments with their own currency do not create more debt for themselves, since the money they need is printed by the banks, a purely digital matter costing almost nothing. The US Central Bank has an article on the “Creation of money” open on their web do the Geman and Norwegian Central Banks..

    Philip Butler

  • Travis Taylor says:

    This is a nice piece by Mr. Baker, and it helps put this government spending and deficit data in perspective. It does, however, seem somewhat dismissive and subject to recency bias when he writes: “That is not impossible, but it does seem unlikely. We have not seen a serious problem with demand generated inflation in more than four decades.”

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