It Is Impossible To Cut Government Spending
There is a widespread view in both parties that it is feasible and desirable that in the future the federal government should be no larger as a share of the overall economy than it has been historically. Unfortunately, this is unlikely to be achieved. For structural reasons, even preserving the amount of government functions that predated the financial crisis will require substantial increases in the share of the U.S. economy devoted to the public sector.
Summers’s ultimate conclusion, of course, is that taxes must be raised since it is impossible to cut spending. Or as he puts it: “How government can best prepare for the pressures that loom, and how greater revenue can be mobilized without damaging the economy, are the great economic questions for the next generation.”
Summers identifies our nation’s aging population and the inevitable return of normal interest as key sources for future growth in government spending, but then he writes:
Increases in the price of what the federal government buys relative to what the private sector buys will inevitably raise the cost of state involvement in the economy. Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing, and more than a hundredfold relative to the price of televisions.
This is actually true. The more the government dominates a sector of the economy, the higher the costs are in that sector. Just look at health care where, according to data compiled by the California Health Care Foundation, the percentage of health care bills paid by the government has risen from less than 10 percent in 1960 almost 50 percent today. At the same time, health spending as a share of GDP has skyrocketed from 5 percent in 1960 to 18 percent today.
The link between government spending and runaway costs is simple: when people don’t have to pay for something, they consume more of it. Between 1974 and 1982 the RAND Corporation conducted a classic random sample study testing how people responded to health care costs. The study randomly assigned families to different health plans that varied from no cost sharing (i.e. “free care”) to plans with high co-pays but lower premiums. RAND found that consumers in the high co-pay plans consumed less health care at lower costs. Additionally, RAND found that for most typical Americans, the variation in health care use “appeared to have minimal to no effects on health status.”
So, contra Summers, we can cut government spending. We just need to get government out of major economic sectors like health care and education.