Earlier today, John Boehner showed a chart projecting a gigantic budget deficit if current spending plans are in place.
It’s well established that the primary future driver of spending is going to be Medicare, ergo everyone wants to figure out how to reduce the cost of Medicare (either by privatization, reduced benefits, or some other fix to healthcare inflation).
But there’s a simple way to get deficit reduction that doesn’t involve Medicare: Lower the unemployment rate. Matthew O’Brien made this point on Twitter earlier, but you might not realise how significant the concept is.
This chart going back to 1948 shows a remarkably stable improvement between the unemployment rate (blue line) and deficit/GDP (red line).
This chart has been floating around for a while, and at least I, personally, didn’t think much of it the first time I across it. There is an element of tautology to it. When the economy improves, unemployment goes down, and deficit/GDP shrinks, as tax revenue goes up. When the reverse happens, deficits rise. Duh, right?
But not so fast…
The post-2009 period is associated with a virtually unprecedented pursuit of government spending and deficits (as far as the eye can see!). Not only did the deficit go up because tax revenue collapsed, but Obama announced a historic stimulus the likes of which weren’t seen since the New Deal.
And yet! The relationship holds. Even when the government purposely spends like crazy to increase the debt and fight the weak economy, deficits/GDP have shrunk alongside unemployment. There is a big gap between the red and blue lines, perhaps in part because the downturn was so severe, but the clear lesson is that spending to reduce unemployment does have the effect of reducing deficits as a share of total GDP.
That’s part of why John Boehner’s chart of of Medicare spending exploding the deficit is in economic lala-land. As it is, entitlements have already been growing as a share of overall government spending, but the primary driver of deficits remains the economy.
As this chart from Heritage makes clear, exploding entitlement costs are not a new story, having grown from 2.5% of GDP a few decades ago to 9.7%. So if increasing entitlement spending were enough to explode the deficit, we’d already see the effects of this. As it is, unemployment is the real driver.