Numerology on the Deficit Commission

An excellent point from Dean Baker who rightly slams Deficit Commission Chair Erskine Bowles for laying down a seemingly arbitrary principle that federal government spending should never exceed 21 percent of GDP.

On the one hand, the problem here is just that Bowles gives us no reason to think anything in particular is motivating this number. On the other hand, the problem is that the government spending share of GDP is a highly imperfect measure of the government’s role in the economy. For example, we could raise taxes by some gigantic amount and then use the funds to provide everyone with a basic health insurance policy. Alternatively, we could have a regulatory agency define “basic health insurance policy” and then make a rule that everyone who fails to purchase a basic health insurance policy has to pay a fine, and then raise taxes a modest amount and subsidize the purchase of basic health insurance policies for people who can’t afford it. There are pros and cons to each approach, but these are basic similar policies, despite the fact that they’ll lead to wildly different levels of government spending as a percent of GDP.

Looking at federal government spending is even more arbitrary.

The point is that we should endeavor to provide public services in an effective and efficient way, or else not provide them at all. What’s more, over the long run revenues and expenditures should even out. But setting arbitrary caps on expenditures simply encourages legislatures to dream up accounting gimmicks to obscure what’s really happening. The important thing is to demand that new initiatives—be they “spending” or “tax credits” or what have you—be paid for and their benefits weighed against their costs. We already had a number of signature Obama administration legislative initiatives hobbled by arbitrary numerical targets ($800 billion stimulus, $900 billion health care) and those were at least round numbers!