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Brooks Wilson's Economics Blog: The Trouble with Tribbles and Entitlements

Thursday, April 14, 2011

The Trouble with Tribbles and Entitlements

In the Star Trek episode, “The Trouble with Tribbles,” the crew of the Enterprise docked at a space station where they found tribbles, small cuddly creatures that emit a warm, cooing sound.  Tribbles are very much like federal unfunded entitlements.  The promise of a worry free retirement with all the medical care that we desire is comforting.  Unfunded entitlements have something else in common with Tribbles; they both grow rapidly when fed, stressing food supplies in the case of tribbles and debt levels in the case of unfunded liabilities. 

The graph, “Total Revenues and Outlays,” shows actual revenues and outlays between 1971 and 2010 and projected revenues and outlays until 2021.  The graph does not reflect the budget deal that reduced expenditures by $38 billion or less than two tenths of one percent of GDP.  The vertical black line in 2011 separates actual budget numbers from the projected numbers.  The dashed red line is the average level of outlays as a percentage of GDP for the years 1971 through 2010.  The dashed blue line is the average level of revenue as a percentage of GDP for the same years.

The last two years have produced historically large deficits of 11.0 and 9.4 percent of GDP.  Outlays are higher than the historical average and revenues are lower.  Beginning in 2011, the gap between revenues and outlays narrows dramatically but both are well above the historical average of revenues and outlays as a percentage of GDP.  The CBO’s major assumptions in the projection include (The Budget and Economic Outlook: Fiscal Years 2011 to 2021”)
Sharp reductions in Medicare’s payment rates for physicians’
services take effect as scheduled at the end of 2011;

Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;

Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and

Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

The CBO must use these assumptions because they are part of current law but they seem rosy.  There would be huge political blowback for politicians that allow taxes to increase or Medicare payments to decrease implying that the national debt will almost certainly grow faster than the CBO projection.  But these projections show the national debt continuing to rise past the dangerous level of sixty percent.  Beyond the projection, unfunded Medicare, Medicaid and Social Security entitlements continue to increase.

Doctor McCoy learned that tribbles would not reproduce if they were not fed.  Some economists have suggested a similar “starve the beast” strategy to limit the growth of entitlements and other government expenditures. 

Gary Becker, Edward Lazear, and Kevin Murphy present evidence in a 2003 article, “The Double Benefit of Tax Cuts,” that the Reagan tax cuts of the 1980’s starved the beast producing reform and lower spending in the 1990’s. 

In a 2008 paper, “Do Tax Cuts Starve the Beast: The Effect of Tax Changes on Government Spending,” Christina Romer and David Romer present empirical evidence that cutting taxes does not starve the spending beast.  They suggest two alternative theories that they believe better fit the data: fiscal illusion, a tax cut without a spending cut weakens voters’ association of spending and taxes leading to an increased demand for spending, and shared fiscal irresponsibility, in which supporters of lower taxes or bigger expenditures jointly agree to ignore the impact of their actions on deficits.

I see evidence that all three effects influence political behavior.  In light of the growing national debt, today I would place my money on fiscal illusion but being a small government guy, I am pulling for starve the beast. 

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