Federal Reserve Bank of St. Louis economist Daniel Thornton has a new paper looking at long-run factors in the U.S. deficit and debt. His graphs tell a familiar story, but one worth repeating.
Federal debt has been growing as a percent of GDP for the last 30 years.
Mechanically, that’s because spending went up relative to GDP and taxes did not.
In terms of explaining why spending as a percent of GDP went up, defense spending as a percent of GDP is about the same as it was in 1980, whereas transfer payments have grown significantly.
And within transfer payments, the growth has primarily come from Medicare and Medicaid.
To the extent recent declines in tax rates have contributed, one sees this primarily in the form of lower tax rates for the bottom four income quintiles in the following graph of combined income and Social Security tax rates.
The political impasse facing the U.S. arises from one simple reality: Americans want an increasing government contribution to health care, but don’t want to pay for it.