Friday, December 06, 2013

Tiny Budgets

Dean Baker, in discussing the cost-of-living adjustments for Social Security today, points out that the measure he favors would only cost “$60 billion, a bit less than 0.4 percent of GDP.”

Not that I oppose the adjustment that he is advocating, but why does that calculation have any meaning whatever? Other, that is, that an economist is using it because it creates the impression that $60 billion is an infinitesimally small amount of money? Why is the amount of money being spent by the Social Security Administration being compared to the Gross Domestic Product of the entire nation?

Is $60 billion per year actually a small amount of money? It’s less than one percent of the amount of money moved by the entire economy of the United States in a year, but what does that have to do with anything? What portion of the Social Security Administration’s budget is it? That's what actually matters. The SSA will take in $959 billion this fiscal year, and will pay out $871 billion in benefits, so that $60 billion is roughly 6% of revenue, and it would raise benefits by almost 7%, which may be perfectly acceptable but is by no means trivial.

When I decide whether or not I can afford to buy a car I do not calculate what portion of the nation’s economy would be eaten up by that car payment; such a calculation would be utter stupidity. I calculate what portion of my own personal budget would be eaten up by that car payment.

Calculating the cost of government programs against the economy, rather than against federal revenue, certainly makes them look less expensive and makes it easier to justify excessive government spending, but it is idiotic and utterly dishonest.

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