Sunday, February 22, 2009

Are We Headed Towards Socialism? A Fact-Based Look

It's been a relatively slow news cycle the last couple of days with congress on vacation. Rather than continue discussing Eric Holder's remarks or look at Hillary Clinton's trip to China, I thought we'd take a look at a common theme being drummed up by conservative commentators -- that this country is on a path to socialism.

It's an interesting question, so I thought we'd take an in-depth look at federal expenditures over time. Let's start by analyzing the basics -- what the government spends money on. The graph below shows the breakdown of Federal spending for 2008.

Our top two areas of expenditure -- both at 21% of the budget are Defense and Social Security. Defense spending, while a huge portion of the overall budget, is actually at a relatively historically low level. Since the Vietnam war, Defense spending has averaged 5.0% of GDP. It peaked in the height of the Cold War in 1986 at 6.2% of GDP (remember all of Reagan's initiatives to beef up our defense as part of the arms race that some contend ultimately bankrupted the Iron Curtain.) It's low point was at 3.0% of GDP from 1999-2001 -- remember the "peace dividend" that Clinton spoke of in his years. Clearly our wars in Iraq and Afghanistan have beefed up military spending significantly, but at 4.3% of GDP in 2008, it is below its historical average.

Social Security, on the other hand, has been a relatively constant expenditure. In the past 40 years, it has averaged 4.2% of GDP. It peaked from 1992-1994 at 4.6% of GDP, it stands at 4.3% of GDP today. The data are actually fairly surprising, given that there has been much talk of the growing cost of Social Security -- when, in fact, it has not really grown much over the past 40 years, relative to the size of the economy.

Our next two blocks of budget, at 16% of the budget each are Domestic Discretionary and Medicare. Domestic Discretionary incorporates all non-entitlement domestic spending -- things such as education, infrastructure, etc.

Domestic discretionary spending is in line with historical averages for the past 40 years, standing at 3.4% of GDP, versus an average during that period of 3.5% of GDP. Spending peaked in 1978 at 4.8% and was lowest in 1999 at 3.0% following welfare reform.

Medicare, on the other hand, is at its highest level ever at 3.2% of GDP. It has steadily grown over the past 40 years from 0.7% of GDP 40 years ago to today. Overall rising healthcare costs have been a major contributing factor, as was the Bush prescription drug benefit, with costs rising 50% in the 8 years of the Bush administration alone.

Those 4 spending categories account for 74% of spending. The other categories: Medicaid, Unemployment Benefits & Food Stamps, Disability Benefits, Other Entitlements and Foreign Aid are all small.

So, from a budgetary perspective, we can see that most categories have been relatively stable over the past 40 years, with the exception of Medicare, which has seen a cost explosion. Clearly a future budgetary issue that we aren't talking about today.

But the claim of Socialism probably has less to do with WHAT we are spending money on vs. HOW much we are spending.

So what is Socialism, anyway? There is no firm definition, but the primary implication is that it is government control of the economy, although less so than Communism.

So, let's establish a rough scale:

If government spending is at 0% of GDP, we have anarchy as we have no government.
A purely capitalist system, with only Defense and a small amount of law enforcement covered by the federal government would involve 5-10% of GDP.
A "protected" capitalist system, where we have a social safety net for retirement, unemployment, health care, etc., would involve 10-15% of GDP.
Spending above 15% of GDP largely involved government involvement in areas like education, commerce, etc.

So when do we become "socialist"? My best definition would be that for the government to "control" the economy, it would need to account for the majority of economic activity, or in other words, comprise > 50% of GDP.

A purely communist system would involve the government accounting for 100% of GDP.

So, where have we ranked at what track are we on?

As you can see from the graph, we have been very steady in the past 40 years, with government spending moving between 17% and 23% of GDP. We are right near the center of that range today, at 20% of GDP. Spending peaked in 1986 with the Reagan defense expansion and was at its low point in 2000 following Clinton's welfare reform and peace dividend.

So we are a LONG way from being socialist.

But will Obama take us there? The $780 billion stimulus package, spread over approximately 3 years, will tack on about 2% of GDP. The second half of the bank bailout, assuming it is all spent in one year, will add another 3% of GDP. So, we could easily see 2009 expenditures in the 25% of GDP range, at the high foor the last 40 years. Universal healthcare could add more if, in fact, we see a bill in the next couple of years.

But the bank bailout certainly and the stimulus bill probably are temporary measures. I doubt we are on track to hit the 50% mark in the Obama administration. But the real test will be when President Obama unveils his budget proposal on Tuesday. He intends to present a 4-year plan, so we'll see what will happen to expenditures.

The bottom line is that I seriously doubt discretionary spending will lead us to socialism. It represents too little of the budget. Keep in mind, based on overall spending, Reagan was the most "socialist" President of the past 40 years, Clinton the most "capitalist".

But fundamental structural changes are happening to our economy in this recession. We'll have to stay posted and see what Obama unveils.

Site Update
Since adding a site traffic counter on January 24th, this site has received 345 hits or an average of about 12 visitors per day. That's great for a site that posts no advertising and has been spread entirely by word of mouth.

Keep sharing the word and tell your friends about this site and as always, I invite you to join in the dialogue.

I'll keep you posted with site statistics as time passes. I expected that we will peak closer to elections.

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