Entitlement Spending: A Graph Designed to Shock

Greg Mankiw reproduces what might appear to be a shocking document from the latest CBO report, which is entitled “Cumulative nominal percentage growth from 2006 level”. As you look at this graph, we should also read the accompanying text:

After 2010, spending related to the aging of the baby-boom generation will begin to raise the growth rate of total outlays. The baby boomers will start becoming eligible for Social Security retirement benefits in 2008, when the first members of that generation turn 62. As a result, the annual growth rate of Social Security spending is expected to increase from about 4.5 percent in 2008 to 6.5 percent by 2017. In addition, because the cost of health care is likely to continue rising rapidly, spending for Medicare and Medicaid is projected to grow even faster – in the range of 7 percent to 8 percent annually. Total outlays for those two health care programs are projected to more than double by 2017, increasing by 124 percent, while nominal GDP is projected to grow only half as much, by 63 percent (see Summary Figure 1.). Consequently, under the assumptions of CBO’s baseline, spending for Medicare, Medicaid, and Social Security will together equal nearly 11 percent of GDP in 2017, compared with a little less than 9 percent this year. Revenues are projected to increase sharply after 2010 given the assumption that various tax provisions expire as scheduled. In the baseline, total revenues grow by 9.2 percent in 2011 and by 7.5 percent in 2012, thereby bringing the budget into surplus. Beyond 2012, revenues are projected to grow at about the same pace as outlays (by roughly 4.5 percent a year), keeping the budget in the black through 2017 under baseline assumptions. Relative to the size of the economy, outlays are projected to range between 18.8 percent and 19.7 percent of GDP during the 2008-2017 period under the assumptions of CBO’s baseline – lower than the 20.6 percent average of the past 40 years (see Summary Figure 2.).

Three observations here: (1) the rise in the share of entitlements as a share of GDP is not so great that we will see spending exceed 20% of GDP if the rest of this forecast holds; (2) letting the tax cuts expire will insure sufficient tax revenues to cover this rise in entitlement spending; and (3) figure 2 is probably a more meaningful measure as it plots spending and revenues as a share of GDP. Figure 1 is odd in two respects – the focus on nominal increases rather than real increases and its insistence at showing the cumulative increase. I guess the goal was more to shock the reader than inform the reader.

Update: I think another graph might prove useful here – that being the cumulative nominal percentage growth from 1998 level in defense spending as reported by the Bureau of Economic Analysis. Our graph shows actual data from 1998 to 2006 and uses the CBO projections of GDP for 2007 and 2008. I had to extrapolate defense spending by assuming that it will grow by 8% per year for the next two years. Given that the President’s budget proposal calls for DoD spending to be over 17% higher in 2008 than it was in 2006 – my assumption seems reasonable if not conservative. Now one might infer from the graph that the doubling of defense spending in a decade is, well, just shocking. But this would represent an increase in the share of GDP devoted to defense where it would grow from 3.95% in 1998 to 5% in 2008. Not as shocking – is it?