Cutting Federal Government Spending:
Yes We Did
David R. Henderson
Research Fellow, Hoover Institution,
Stanford Universit...
Me with Former President Reagan,
January 1993
Canada’s Budget Triumph
Federal spending on programs (as a
percent of GDP):

•
•

1992-1993: 17.5 percent
2000-2001: 11.3 ...
Canada’s Budget Triumph (cont)
Federal spending on servicing the federal
debt (as a percent of GDP):

•
•

1992-1993: 5.6 ...
What is a “Cut”?
When analysts refer to government budget cuts,
they do not all use the word “cut” the same way. A
cut in ...
America’s Budget Triumph
Figure 1
Federal spending as % of GDP
25

% GDP

20
15
10
5
0
1990

1991

1992

1993

1994

1995
...
Defense Spending as % of GDP
Figure 2
Defense spending as % of GDP
6
5

% GDP

4
3
2
1
0
1990

1991

1992

1993

1994

199...
Net Interest on Debt as a % of GDP
Figure 3
Net interest as % of GDP
3.5
3

% GDP

2.5
2
1.5
1
0.5
0
1990

1991

1992

199...
The Big Three
Figure 7

% of GDP

Social Security, Medicare, and Medicaid Spending as a Percent of GDP.
9
8
7
6
5
4
3
2
1
...
Other Domestic Spending
Fell from:
•
•

6.41 percent of GDP in 1990 to
5.40 percent in 2000
Was High Economic Growth in the 1990s
an Important Cause?
Average annual economic growth by decade:
•
•
•

1990s: 3.2 perc...
Did Cuts Hurt Growth?
Growth in last half of decade, 1995-2000,
after most of the cuts had kicked in:
•

4.0 percent annua...
Due to United Legislative/Executive, as in
Canada?
No.
1990-1992: R Pres, D Congress
1993-1994: D Pres, D Congress
1995-20...
Earlier Evidence: Drop in Post WWII
Federal Spending
Post WWII Growth of Real Private GDP
Moral of the Story
Modest cuts in spending (in real terms),
combined with keeping growth in spending
below growth in GDP, ...
Where Cuts Can Be Made?
Defense spending today, at about 3.8 percent
of GDP, is below where it was at the start of
the 199...
The Danger of Our Current Debt
•
•

•

Net interest on the debt is very low.
This is because the interest rate on the
debt...
Solution: Lock in Low, Long-Term Interest
Rates
•

•
•

Short-term problem: If we lock in longterm rates on, say, $3 trill...
Yes We Can – Cut Federal Spending
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Cutting Spending in the US: Can It Be Done

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Is today’s political climate too toxic to reduce spending? Does divided government make it impossible to make substantial cuts?

For answers to these questions and more, please join the Mercatus Center at George Mason University for a Capitol Hill Campus featuring Dr. David Henderson. Dr. Henderson will walk you through how an often vitriolic group of lawmakers came together in a bipartisan way to reduce spending in the 1990s and explain how we can once again exercise restraint.

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Cutting Spending in the US: Can It Be Done

  1. 1. Cutting Federal Government Spending: Yes We Did David R. Henderson Research Fellow, Hoover Institution, Stanford University and Associate Professor of Economics, Graduate School of Business and Public Policy Naval Postgraduate School
  2. 2. Me with Former President Reagan, January 1993
  3. 3. Canada’s Budget Triumph Federal spending on programs (as a percent of GDP): • • 1992-1993: 17.5 percent 2000-2001: 11.3 percent
  4. 4. Canada’s Budget Triumph (cont) Federal spending on servicing the federal debt (as a percent of GDP): • • 1992-1993: 5.6 percent 1999-2000: 4.3 percent
  5. 5. What is a “Cut”? When analysts refer to government budget cuts, they do not all use the word “cut” the same way. A cut in government spending can mean one of four things: (i) A cut in the dollar amount of spending even when there is inflation; (ii) A cut in real spending, that is, an inflationadjusted cut; (iii) A cut in spending as a percent of GDP; (iv) A cut in the planned increase in spending.
  6. 6. America’s Budget Triumph Figure 1 Federal spending as % of GDP 25 % GDP 20 15 10 5 0 1990 1991 1992 1993 1994 1995 Year 1996 1997 1998 1999 2000
  7. 7. Defense Spending as % of GDP Figure 2 Defense spending as % of GDP 6 5 % GDP 4 3 2 1 0 1990 1991 1992 1993 1994 1995 Year 1996 1997 1998 1999 2000
  8. 8. Net Interest on Debt as a % of GDP Figure 3 Net interest as % of GDP 3.5 3 % GDP 2.5 2 1.5 1 0.5 0 1990 1991 1992 1993 1994 1995 Year 1996 1997 1998 1999 2000
  9. 9. The Big Three Figure 7 % of GDP Social Security, Medicare, and Medicaid Spending as a Percent of GDP. 9 8 7 6 5 4 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Medicare Social security Medicaid Total
  10. 10. Other Domestic Spending Fell from: • • 6.41 percent of GDP in 1990 to 5.40 percent in 2000
  11. 11. Was High Economic Growth in the 1990s an Important Cause? Average annual economic growth by decade: • • • 1990s: 3.2 percent 1980s: 3.2 percent 1970s: 3.2 percent
  12. 12. Did Cuts Hurt Growth? Growth in last half of decade, 1995-2000, after most of the cuts had kicked in: • 4.0 percent annual average real GDP growth
  13. 13. Due to United Legislative/Executive, as in Canada? No. 1990-1992: R Pres, D Congress 1993-1994: D Pres, D Congress 1995-2000: D Pres, R Congress
  14. 14. Earlier Evidence: Drop in Post WWII Federal Spending
  15. 15. Post WWII Growth of Real Private GDP
  16. 16. Moral of the Story Modest cuts in spending (in real terms), combined with keeping growth in spending below growth in GDP, will ultimately balance budgets and even produce budget surpluses.
  17. 17. Where Cuts Can Be Made? Defense spending today, at about 3.8 percent of GDP, is below where it was at the start of the 1990s, when it was about 5.2 percent. There is still room to cut defense spending substantially. But the growth in government spending in the future will be mainly in Medicare, Medicaid, and Social Security.
  18. 18. The Danger of Our Current Debt • • • Net interest on the debt is very low. This is because the interest rate on the debt is low. Even a one-percentage-point rise in interest rates on the approximately $12 trillion in debt held by the public would increase government spending by a hefty $120 billion. This is about 0.75 percent of GDP.
  19. 19. Solution: Lock in Low, Long-Term Interest Rates • • • Short-term problem: If we lock in longterm rates on, say, $3 trillion of debt, debt service on this $3 trillion immediately rises by $90 billion. Long-term benefit: If interest rates rise by more than 3 points, feds will save money. Diversified strategy: That’s why I chose $3 trillion.
  20. 20. Yes We Can – Cut Federal Spending
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