Impact of Inflation
Comparing Budget Levels
It is widely understood that the value of one dollar in 1912 is not the same as the value of one dollar in 2012. This is because in most economies, including that of the United States, prices for goods and services tend to increase over time. This phenomenon, commonly referred to as inflation, has important consequences for long-term economic comparisons. For example, in 2000, the federal government's total budget was $1.8 trillion, more than 800 percent greater than the $195.6 billion spent thirty years earlier. It is important to recognize, however, that due to inflation every dollar spent in 1970 purchased far more than that same dollar thirty years later. In this case, $195.6 billion in 1970 translates into about $828 billion in 2000. The resulting overall increase in federal spending is nearer to 100 percent, as opposed to 800 percent previously noted.
Inflation has a very real and observable impact when discussing the spending changes over time. If a program spends $100 million one year, that same $100 million will not go quite as far the next year. This discrepancy is why economists distinguish between "real" value and "nominal" value. The real value accounts for the impact of inflation from year to year, while the nominal value reports the level as it existed or exists at any given time. The nominal value of federal spending in 1970 was $195.6 billion. The real value, in year 2000 dollars, was $828 billion.
Adjusting for inflation is an important step in any fiscal analysis, even a relatively short-term one. According to the Bureau of Labor Statistics, the inflation rate was a cumulative 10.8 percent from 2008 to 2012. Therefore, any program that did not experience a nominal funding increase of at least that amount during that time is spending at a lower "real" level, which leads to negative real growth in spending. Analysts refer to this type of funding trend as that which "fails to keeps pace with inflation."
For each program listed herein, the website reports the nominal funding level and the nominal percent change from the previous year, as well as the real percent change. Of course, inflation rates have yet to be determined for 2012 and 2013; this book assumes a 2.2 percent inflation rate for 2012, and a 1.9 percent inflation rate for 2013. These rates are based on economic assumptions in the President’s Budget Tables.