Budget Scare Stories

Dean Baker is the co-director of the Center for Economic and Policy Research. He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.

Budget numbers can be complicated. Politicians exploit this fact to mislead the public about their successes and their opponents’ failings. Foremost in the former category is President Bush’s effort to tout the decline in the budget deficit over the last two years as evidence of the success of his tax cuts.

While the budget deficit has fallen by almost $200 billion (or 1.4 percent of gross domestic product) in the last two years, this is a normal cyclical pattern (deficits fall when the economy recovers), not evidence of the success of Bush’s tax cuts.

Unfortunately, President Bush is not the only one trying to deceive the public about deficits. There is an entire industry of economists, budget analysts and pundits that maintains a steady drum beat about the long-term budget crisis facing the country. They have developed a whole array of tricks that they regularly employ to mislead people about both the size and the causes of the projected budget problem.

The first trick in their bag is to refer to the value of future deficits in the trillions of dollars. This is a nice trick for two reasons. First, they assume that we will leave the structure of current programs in place forever more. This is important for a program like Social Security, since naturally the costs will get higher if we never raise the retirement age even as life expectancies get up into the 90s somewhere in the 22nd century. Since none of us have any idea what Social Security, the economy or the planet will look like in the 22nd century, it is not clear what information our deficit projections for this period and future centuries gives us.

The other trick is expressing the size of the deficit in trillions of dollars. Trillions of dollars are big, really big. (For those who have difficulty spelling, the scaremongers often tell listeners that they are talking about “trillions with a T.”) Of course, no one has any idea what the meaning of a multitrillion dollar shortfall over the infinite future means.

If the motive were to inform rather than to frighten, these people would refer to their projected shortfalls relative to future income. Most people can understand percentages. For example, the very scary sounding $13.4 trillion shortfall projected for Social Security over the infinite horizon can be expressed as 1.3 percent of projected GDP. In other words, these projections show that additional revenue equal to $1.30 out of every hundred dollars of future income can make Social Security fully solvent forever.

Those of us who realize that we live in a democracy, and therefore cannot impose a particular Social Security structure on all future generations, might be content to know the size of the projected shortfall over Social Security’s 75-year planning horizon. This figure is 0.7 percent (70 cents for every hundred dollars of income) according to the Social Security trustees and 0.5 percent (50 cents for every hundred dollars of income) according to the Congressional Budget Office.

These numbers probably aren’t too scary, which is why the scaremongers usually rely on the shortfalls facing “Social Security and Medicare” to convince people that we face a real problem and that its cause is the aging of the population. The projected shortfall for the two programs together is almost $80 trillion (really scary) because the projected shortfall for Medicare is more than five times as large as the projected shortfall for Social Security. Expressed as a share of GDP, the projected combined shortfall is more than 6 percent—which should strike people as a large but not impossible burden. We have increased tax revenue by this much over long periods of time in the past. And, even if we raised taxes by this amount, our tax burden would still be less than in most other wealthy countries.  

But the really important point is that this projected shortfall is being driven by a projected explosion in health care costs. The projections assume that our health care costs, which already average more than twice as much per person as in other wealthy countries, will continue to grow far more rapidly than per capita income. If the projections on health care costs prove correct, then the health care system will impose an enormous burden on the economy, even if we shut down Medicare altogether. The problem buried in these projections is the U.S. health care system, not entitlement programs that benefit the elderly. Obviously, we have to fix the U.S. health care system so that its costs do not follow this projected path.

There are many more tricks in the scaremongers’ basket, but the basic points are simple. If someone wants to seriously discuss projected budget shortfalls, they will express them relative to the size of future income. If their intent to provoke fear, they talk about “trillions of dollars.” If they want to discuss the causes of the projected shortfalls seriously, they talk about Social Security and Medicare separately. If they want to cut programs that benefit the elderly, they talk about Social Security and Medicare together.

So there you have it; a simple guide to distinguish serious budget analysts from scaremongers. Use it aggressively.