Tuesday, the House of Representatives will vote on, and likely pass, a conservative Republican plan called "Cut, Cap, and Balance." The package will include some immediate, as-yet unspecified spending cuts, a statutory cap to keep spending below 18 percent of GDP, and a promised separate vote on a Constitutional amendment that requires Congress to maintain a balanced budget, but essentially forbids any future tax increases.
Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?
Transfer payments as a share of GDP will decline a bit if we ever return to full employment. Of course, the GOP zest for immediate spending cuts – if politically successful – could trigger another recession. But even under the most optimistic assumptions, transfer payments as a share of GDP will remain fairly high if we do not slash and burn our SocialSecurity MedicareMedicaid system, which is not going to happen. So what do these Republicans “leaders” propose we cut? Certainly not defense spending. But unless they are proposing to do away with all nondefense Federal purchases, this notion that we can limit Federal spending to 18% of GDP is nothing more than bad arithmetic.