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Entitlement Spending Increased 11x
While Real GDP Grew 3x Over Past 45 Years

USA Real Federal Expenses, Entitlement Spending, Real GDP % Change, 1965 – 2010

[Chart displaying growth curves]
Total Expenses
Entitlement Programs
Real GDP

Entitlement Expenses +10.6x
Total Expenses +3.3x
Real GDP +2.7x

Note: Data adjusted for inflation. Source: White House Office of Management and Budget.
USA Inc. | Summary
KPCB www.kpcb.com

Take a step back, and imagine what the founding fathers would think if they saw how our country’s finances have changed. From 1790 to 1930, government spending on average accounted for just 3% of American GDP. Today, government spending absorbs closer to 24% of GDP.

It’s likely that they would be even more surprised by the debt we have taken on to pay for this expansion. As a percentage of GDP, the federal government’s public debt has doubled over the last 30 years, to 53% of GDP. This figure does not include claims on future resources from underfunded entitlements and potential liabilities from Fannie Mae and Freddie Mac, the Government Sponsored Enterprises (GSEs). If it did include these claims, gross federal debt accounted for 94% of GDP in 2010. The public debt to GDP ratio is likely to triple to 146% over the next 20 years, per CBO. The main reason is entitlement expense. Since 1970, these costs have grown 5.5 times faster than GDP, while revenues have lagged, especially corporate tax revenues. By 2037, cumulative deficits from Social Security could add another $11.6 trillion to the public debt.

The problem gets worse. Even as USA Inc.’s debt has been rising for decades, plunging interest rates have kept the cost of supporting it relatively steady. Last year’s interest bill would have been 155% (or $290 billion) higher if rates had been at their 30-year average of 6% (vs. 2% in 2010). As debt levels rise and interest rates normalize, net interest payments could grow 20% or more annually. Below-average debt maturities in recent years have also kept the Treasury’s borrowing costs down, but this trend, too, will drive up interest payments once interest rates rise.

KPCB
www.kpcb.com
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