Government Spending and the Law of Gravity

Despite having no real propensity in physics, I found myself in that course at Georgia Tech in 1965. I vividly remember a tutor, Professor E. E. Bortell, chanting for the benefit of us slow learners “What Goes Up Must Come Down.”  Actually Professor Bortell would say loudly – “What goes up must…..” and we could chime in “Come down.”  We did it over and over. It was fun and it kept us awake.

So what does that have to do with government spending? I checked the historical record and found that the federal government of the USA spent almost $93 billion in 1945. In subsequent years it went down to $55 billion, $34 billon, and $30 billion. It was pretty clear why the government spent less in those years – World War II was over and it was not necessary to keep spending at that rate. It took until 1961 before government spending reached $93 billion again.

We all understand that some things are temporary. We wear braces for a while but then discard them when our teeth are straighter.  Girls wear training bras until their stuff gets trained and boys get in fights until they learn that stuff about the girls. What goes up eventually comes down. Or does it? Even in the case of World War II there was some debate about the government reducing its spending. Alvin Hanson was a professor who believed in the Secular Stagnation Hypothesis and argued that reducing government deficits after WWII would bring back the Great Depression. In his view spending from the war only stopped the Great Depression temporarily. Without government spending the economy would forever be destined to economic purgatory (or worse).

Is that beginning to sound familiar? If we reduce government spending today, some experts believe surely we will have a double dip and it won’t be chocolate chip. The government didn’t listen to Hanson in the 40s and government spending was allowed to return to a more normal peacetime level. The government deficit had reached an intolerable $15 billion (almost 22% of GDP) in 1945 and returned to surplus for the next three to five years. Today we have a similar situation – we had a temporary surge in government spending during the recession of 2008/2009 and it is time to remove the surge. Or is it? Listening to our friends in government, you would think that what goes up ought to stay up.

Let’s think about the rhetoric as it relates now to the current budget-cut debate.  Think about the emotional and spirited language and gesturing you are seeing on the television. “By God man, you can’t cut that program. Think of all the misery you will cause.” But what does CUT really mean? What I show below is that most of what people are calling cuts are really what we might call a Restoration of Trend – or a return to a more normal growth path.

My focus in this posting is on what is called Federal Discretionary Spending (DS). What I am showing here could easily be expanded beyond the roughly $1.4 trillion we spent on discretionary programs in 2010. DS increased by $306 billion in the three years between 2007 and 2010. That was a 29% increase in three years. In the three years before, 2004 to 2007, DS increased by $146 billion or by 16%.  By any description, the last three years showed a HUGE growth of government wherein spending on DS was approximately double the growth in the previous three years. What value would DS have reached if it grew by the 16% instead of the 29%? Answer – about $1.2 billion or about $135 billion less than the actual amount achieved in 2010.  If in 2011 you took back or removed that extra $135 billion would that be a CUT or a Restoration of Trend?

You say I am playing with words. But this exercise is not about games – it is about making clear that HUGE TEMPORARY INCREASES in government spending are not entitlements that must last forever.  Taking back the $140 billion is NOT A CUT – it is restoring government growth to a sustainable pattern.  Notice that in the above exercise we are letting DS grow buy 16% in three years.  How many of you had increases in spending of 16% between 2007 and 2010?

Below I show the Restoration of Trend Amounts (in millions of dollars) for specific components of DS. The first column shows how much could be reduced from the program to allow it to grow in 2007 to 2010 by the same growth rate as it grew in 2004 to 2007.

Because of the technique used the items for the components do not add up to the total outlay amount. What you see here is how much we could reduce the spending in 2011 compared to its amount in 2010. For example, the education budget could be reduced by $44 billion dollars – and still allow the growth rate to have been 9% from 2007 to 2010. Notice that education spending actually increased by 83% in those three years. Would it really be a huge negative impact to give up some of that explosive growth? Did people become so addicted to the temporary increase that they cannot live with a 9% raise?

I won’t go through the table line by line but notice the last column and the extremely fast growth of spending during 2007 to 2010. Spending on Energy in those years increased by 179%. Except for the two line items at the bottom of the table, spending in 2007-2010 was much faster than in 2004 to 2007. This implies a few things. First, these increases were meant to be temporary.  Second, they are clearly unsustainable. Third, as the first column shows, there is much that could be reduced from 2011 spending and still allow a very rapid increase in spending. I am not suggesting that we remove exactly those amounts in the first column. We could remove more – we could remove less. But surely a prudent policy begins with understanding that these are in no way real cuts.


Note -- I had some trouble getting this table into the post. If it looks too  small to you I think you can just click on it and it will expand to a larger size. Sorry I am pretty lame at this kind of thing!