Is the Federal government too big or are taxes too small?

This is the third post in a series (check out part one here and part two here) that explores the question of whether America’s wealthiest citizens should pay more as we wrestle with our Leviathan budget deficit.

Today I want to take on a big philosophical question that often swallows this debate whole:  Isn’t the real problem that our government is just too damn big?

After all, we wouldn’t need to tax anybody more if we just squeezed government down to match current revenues.

This idea has a lot of traction.  It is the central premise of the Republican Party and of late the GOP has begun to seem fairly prescient.

All over the world, liberal democracies are cutting social services, shrinking their armies, and scaling back public pensions.  They’re doing so because they’ve toppled deeper and deeper into unsustainable debt.

So what about the US?  Is our Federal government a hoggish, cancerous juggernaut, growing out of all proportion to common sense?

The answer, it turns out, is a fairly unambiguous No.

It’s true that if you go back to the era before World War 2, government was a relatively small player in our national economy.  Government spending accounted for between 5 and 10% of our Gross Domestic Product.

In those days, average Americans earned their livelihoods — prospering or slipping into poverty — without aid or interference from Uncle Sam.

But then came the New Deal, the war against Germany and Japan, the Cold War against the Soviet Union and China, and a fundamental shift in our expectations about what American life should look like.

It’s important to note that creating this new version of America — from our massive, globe-straddling military to the vast Social Security entitlement, from inner city housing programs to farm subsidies — was a fundamentally bipartisan affair.

In the process, the Federal government became a major force in the economy and our lives.  And by the 1960s we had settled into into a new range of “normal,” with Federal expenditures ranging from 19-22% of GDP.

Some conservatives and libertarians still rage against this gradual, evolutionary change.  But it’s a  fact that this basic paradigm for how a Federal government should work and what it should do the only one that living Americans have ever known.

And heated rhetoric aside, this version of Uncle Sam has been more or less stable for half a century, with remarkably little growth or change.

Yes, there have been spikes in the post-War era, when government spending rose sharply for brief periods.

During Ronald Reagan’s presidency, total expenditures one year hit 23.5% of GDP.  And during the depths of the recent recession, Barack Obama’s stimulus plan pushed Federal spending to 25% of GDP.

But in the past, the size of government quickly settled back to its usual size, regardless of which party controlled the White House or Congress.

By way of contrast, spending by Greece’s government accounts regularly for close to half of that country’s GDP.   In Great Britain government spending accounts for around 40% of GDP.

The only European country with a central government as small as ours, relative to its GDP, is Switzerland.

So if our rate of government spending as a percentage of GDP is fairly modest, and has been more or less stable for half a century, why are we suddenly tumbling into debt?

Firstly, it didn’t happen quickly at all.  While Americans were getting used to the new size of their government in the the Sixties, they also got comfortable with a consistently lower level of taxation.

Federal spending over the last half century have averaged 19-22% of GDP, but tax collections have generally ranged between 17-20% of GDP.

Occasionally those two ranges overlapped and we had balanced budgets, but not very often — only six times, in fact since 1960.

Unfortunately, the same pattern holds true today.  The the massive and controversial budget deficits of the last two years were caused, in part, by higher spending.

But a nearly equal portion of red ink came in the form of dramatically lower Federal tax revenues, which dropped in 2009 by 3% as a portion of GDP.

Looking forward, it’s obvious that the Federal government will have to shrink again, probably settling back into the low range of normal, with spending levels somewhere around 19% of GDP.

Those cuts will hurt and they’ll hit everything from social security to education to the military.  But despite the hue and cry from liberals they won’t be Dickensian.

We will muddle our way back to about the size of government we had in 2002.

Meanwhile, in order to pay our bills and begin to pay back our massive debts, taxes will have to grow back to around 20.5% of GDP.

Conservatives will balk and moan at the very notion — and yes, it will hurt.  But this kind of hike will only bring us to the level of taxation that we experienced in 2000 during the final year of Bill Clinton’s presidency.

On Monday, we’ll wrestle with another thorny question.  Are the rich already paying more than their fair share?

But for now, as always, your comments welcome.

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23 Responses to “Is the Federal government too big or are taxes too small?”

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  1. Bret4207 says:

    Good job Brian. If we could get the Federal gov’t down into that 17% of GDP area you’d have a lot of happy taxpayers from both sides of the isle.

    I don’t agree that just because we’re used to our enormous Federal Gov’t that it’s “right” to keep it that way, but then I doubt you ever thought I would. Common sense tells me I’m stuck with pretty much the status quo. Voters are seldom willing to give up their personal rice bowls and politicians will always play on that. We could certainly streamline things though. Recently there was a statement that State prisons are not there for the purpose of supporting the communities they reside in. The same goes for the Federal gov’t, it’s purpose is not to provide employment, subsidies and pork projects. If we could simply reduce, not eliminate, but reduce the pork, waste, duplication and fraud we’d be farther ahead. We can cut our military spending too and still provide for security for the homeland. (Yeah, I said cut. It’s time to bring them home.) Privatizing some areas might cut costs and I do think there are some depts that should simply be eliminated, at least from the Cabinet level positions they have now.

    I think the thing that bothers me most about this subject is that many people simply refuse to even consider slowing the growth of the Federal gov’t. We have had Federalists (big, strong Fed gov) and anti-Federalists (states rights/small central gov’t) since day one. The lines between them cross but all this talk is nothing new. Even at the State level we have these issues, most notably with State land purchases. The State simply doesn’t need more land, yet to some people even thinking that puts you in the category of evil tyrant or something. The same thing seems to apply when speaking of stopping the Fed gov growth, of seeing an end to tax and borrow, of lower taxes for everyone some day. It’s not mean or selfish or greedy to want to keep more of what you make. It’s not benevolent or kind or compassionate to hope some group higher up the income scale has to pay more taxes.

    I think there’s a basic disconnect between right and left on this that has nothing to do with compassion or hate or greed or economic situation. The right, at least in my view, see’s taxation itself as inherently questionable, something to be avoided beyond providing for true needs and services, that taking from anyone is fundamentally wrong. The left seems to look at it from the opposite view, that taxation itself is good or something like that, that it can serve to “equalize” things and provide a way to right wrongs. I’m probably butchering that, but that’s what comes to mind. Certainly those are very broad generalizations. If there’s any truth to that at all then it’s naturally going to be very hard to find a happy medium.

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  2. dbw says:

    A couple general thoughts that pertain to both our need for revenue and the extent of our spending, esp. urban areas.

    We are a big, complex society with 300,000,000 people and it takes money and resources to govern and maintain it.

    Our revolutionary origins and democratic instincts as a nation make us shy away from the term empire, but with troops garrisoned around the globe in dozens of countries, it certainly affects our situation.

    The writer Kevin Phillips is one of the most astute of our current political and economic situation. He describes how other dominant countries have passed their apex by overextending themselves militarily and economically. We may have done that with Iraq and Afghanistan. Financing them off the books has really hurt us. If the administration had come to the American people and asked them to support the wars financially with added taxes, I don’t think the public would have been on board.

    At both the state and federal level debt has been incurred in our names, and now the unpleasant obligation of paying it back is upon us. The recent state poll shows that people don’t want their services cut. We need to be willing to pay for those too.

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  3. verplanck says:

    When I hear folks on the right talk about getting back to ‘the way things were’, quoting the founding fathers, and other ways of saying “back in the 1800′s, we really had it figured out and then FDR screwed it all up”.

    I think those types of thoughts are dangerous for our future. Like it or not, we can’t go back to a 19th century model of government. The world is radically different, and it has a different set of problems, problems that government is uniquely suited to solving.

    I can’t speak for the “far left”, but the commentators I read (e.g. Ezra Klein, Josh Marshall) are very pragmatic liberals. They readily admit that there are cuts/changes that can be made to government to make it more efficient. But time and again, the right simplifies nuanced argument to one word. Currently, that is socialism. Never mind that what Obama proposes is nothing like the social welfare states of Scandinavia.

    The “far left” is just as quick to demonize all conservatives as heartless bastards itching to steal grandma’s social security to give it to Wall Street banksters. However, the counter-arguments from the “sensible liberal” set just get rolled into the conservatives’ response to the far left.

    That’s my biggest frustration with arguing with conservatives – I never will get an acknowledgement that government can provide SOME sort of public good, and my ideas are nothing more than commie/socialist plots that will destroy our great nation. I’m more than willing to look at alternatives, just waiting for a conservative to do the same.

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  4. Bill G says:

    The danger in framing the discussion in terms tax receipts and expenditures as a % of GDP is that it avoids the more specific and difficult discussion of the central issues – healthcare (Medicare and Medicaid), Social Security, and defense. The size and, more importantly, the trajectories of these costs, if unaddressed, render historical relationships (that ~20%) meaningless. And, any generalized concept of “shrinking government” in the absence of addressing these programs is nothing more than a smoke and mirrors exercise.

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  5. Pete Klein says:

    If we are voting here, I vote for both higher taxes and cut backs on expenditures. The tax increase? Maybe a few percent up across the board and fewer tax breaks and loop holes. Cuts on expenditures? Much more difficult to pick and choose but I would vote to pull the military out of countries where we are not involved in action as a start. This would free up the National Guard to do important things like provide security at the Super Bowl.

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  6. Paul says:

    I agree with Bill,

    And, ss long as the holders of US debt remain satisfied that we can pay them back we can hold steady. I think there is a growing desire in the country to NOT have our future based on the “kindness of strangers”.

    These “strangers” are a growing economic force and the old rules of the game Brian describes may not hold true for long. Once they change we are in serious trouble. In my opinion, not dealing with it now is a big mistake.

    In the decades past that Brain describes there was only one economic superpower, not for long!

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  7. DBW says:

    I am not so sure about China becoming a super power. Two decades ago Japan was supposed to eat our lunch. Now there debt is twice the size of their GDP. The Chinese are likely to suffer environmental collapse before they ascend to superpower status. Also, I do not see them acting from a position of strength but out of desperation to meet the aspirations of tens of millions of rural countrymen.
    As for the US, lets raise taxes and address spending over the next five years and see where we are then. l

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  8. JDM says:

    There are many things the government should get out of.

    The GOP house has a list of how to downsize $2.5 trillion with a “T”.

    Let’s do it.

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  9. Paul says:

    There was an excellent NPR story this morning on a Michigan company making solar panels that employs 500 workers. They got federal and state assistance to get started. They just sent a letter to the state of Michigan saying they are moving to China.

    Along with this China has said that it will stop exporting rare earth metals. The stuff essential for the “green” economy we hope to have. It is needed for production of both solar panels and wind turbines and more. China is just about the only source in the world that makes these essential raw materials.

    The world is changing quickly.

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  10. Bill G says:

    There’s a lot of rhetoric about reducing the size of government but neither democrats nor republicans appear to be willing to address the real issues – Medicare/Medicaid, SS and defense. The core constituency in the electorate that scares them both is the baby boomer generation, which is loathe to give any on healthcare or SS and, generally speaking, reluctant to embrace an aggressive position on reduction in defense spending. Neither party is willing to alienate this constituency by taking a leadership role on these issues. Yet, that is what is needed. This is where bipartisanship would have some true meaning, since measures to reduce spending in these areas unilaterally would likely be politically suicidal for the party sponsoring them.

    The Bowles – Simpson Commission presented a framework for moving the dialog forward but Obama, who sponsored the effort, has not publicly embraced its recommendations and Paul Ryan, an extremely influential member of the commission, distanced himself from them. Until political leaders on both sides of the aisle show some guts, there won’t be any meaningful movement, just further phony discussion of the elimination of “fraud, waste and abuse”.

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  11. Mervel says:

    The ebb and flow of government spending as a percentage of GDP has historically been a function of the ebb and flow of the economy not the size of federal spending. Total Federal spending has not varied in recent memory it has not ever been reduced it is on a consistent trudge upwards and has been for decades. I do not think we have the will or ability to reduce the total size of federal spending through the political process. It is not a forgone conclusion at all that any real spending cuts will happen in a significant way. The one area with real potential for reduction is the military.

    But we can’t raise taxes nor should we cut spending until we get a national unemployment rate below 7%. This stuff all sounds good on paper but even the real conservatives have no stomach for any real cuts that will put unemployment up in the high teens and have the added benefit of cutting off seniors from health care and their social security payments. Yes sir that sounds like a political winner.

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  12. Bret4207 says:

    Verplank, the rights “socialism” is the lefts “party of NO!”. That’s just politics I suppose. And conservatives are acknowledging gov’t is needed, just not a gov’t that is financially irresponsible, that reaches further and further into our lives or one that gets into areas it has no business in. Conservatives are just like you, waiting for the left to look at alternatives.

    On Medicare/caid/Defense/Social Security- If these are truly the areas people desire gov’t to concentrate on then fine, lets do it. But that means something else is going to have to give. Might as well enact means testing in Social Security since it’s in a permanent deficit status already, despite those who claim it’s “fully funded”. Defense we can cut back on, but for our troops and nations sake we need to do it wisely, not with the broad sword. Medicare/cade…well, we made that mess, now we’re stuck with it. I don’t know how we’re going to solve that problem.

    So, where do we cut and whom do we fire? We can cut the Depts. of Education, HHS and Energy right off the bat and move them into other depts, streamline and consolidate what we can and go from there. there are bunches of directorates, depts and administrations that could be the subject of streamlining and efficiency. Same at the State level.

    So who do we look to to make the hard choices? Nobody out there is willing to touch SS. No one wants to bear bad news. A few hard core conservatives are, but there aren’t any willing to risk their position as of yet.

    I think we’ll end up with more of the same platitudes, smoke and mirrors. Oh, and higher taxes and debt.

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  13. Mervel says:

    Plus we just added a new program with the health reform act; we do not have the ability in this country to provide public health care without massive costs. No one wants to even talk about that new program, NOBODY really believes that health care reform will not cost massive amounts of money.

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  14. Pete Klein says:

    Bret, if you are going to have means testing in Social Security, why not means testing for health insurance and pensions?
    People pay into Social Security and Medicare, just as they pay into health insurance and most pensions. Although if that were done, it would probably lower the cost of health insurance who aren’t rich enough to pay out of pocket.

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  15. knuckleheadedliberal says:

    We need a society that is comfortable with moderation. We as a nation have no problem dealing with our levels of debt and spending if we can only agree to managing the situation over a long period of time.

    The Right decided at some point in time that government was too big and their strategy was to starve the beast. It seems counterintuitive but the way they sought to starve the beast was to cut taxes and increase spending, that way everyone would agree that we would have to cut government program.

    We have gone through a period when economic times were good and taxes were cut, wars were started and debt was not paid down.

    The economy goes through cycles that could be graphed as a sine wave and we react to it in a sine wave that is off-set because we are always reacting to what happened in the recent past. What needs to be done is to slightly increase government income and slightly decrease government expenditures for a long enough period that we bring our level of debt under control and to reduce it over time. Just like a home mortgage this would take a couple of decades.

    It isn’t crazy to have the top tax bracket increase by 3% and it isn’t crazy to reduce government spending a few percent, but why leave the military budget off the table when it comes time for cuts?

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  16. phahn50 says:

    Compared to other western democracies, we already have a small government (but we have a huge military). The problem that all the western democracies have is that the demographics are shifting to older and older people, meaning that we are heading to a situation where there are fewer and fewer working people supporting more and more retirees. Combined with rising health costs for even the single-payer socialist countries, we have challenges ahead to say the least. The “just say no” to taxes approach does a lot more harm than good.

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  17. Bret4207 says:

    Mervel, you crazy right wing kook you! Talk like that about Obamacare will get you labeled a mean spirited neo-con!

    Pete, Medicare/caid are supposed to be means tested now. How you’d means test a pension or health insurance I don’t know. The systems I’m familiar with don’t allow much leeway, ie- if you take the job the money comes out of your check, just like your union dues you can’t not pay!

    They could start means testing for SS with people like me that are 12-20 years out from minimum SS eligibility. To be honest, I have zero expectation I’ll get anything from SS, so it’s all the same to me.

    Knuck, interesting, if somewhat inaccurate theory, at least IMO. I would agree that there’s nothing wrong with raising the marginal rate by 3%, but your going to have to have it on more than the top brackets. More likely it’ll be an across the board increase if you don’t do some serious spending cuts, including the military. Funny, no one wants to pay more when it’s themselves being affected.

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  18. knuckleheadedliberal says:

    Not a theory Bret, just the way it is except for maybe a quibble about the exact percentages.

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  19. Jeff says:

    A higher Gross Domestic Product will benefit the ratio if expenditures do not increase. That requires doing something that generates taxable income.

    Government is for common services not provided otherwise or to level out dis-proportions. There aren’t enough people to need an interstate in
    Wyoming however it is deemed practical to put one there so others can pass through and the locals can use it too.

    When legislators waste time grandstanding & fussing about who should sit where or revisit freshly plowed ground ( the healthcare bill) I would say they have too much time on their hands and maybe we need less of something. At least when a farmer goes over tilled ground he often adds something, even if it stinks. But he doesn’t waste energy plowing it twice.

    I think it is worth questioning the value of an Federal Education Department or at least the extent of its influence.– I am not excluding other departments to cite that one. OSHA does not act in every state instead states can choose to have their own organization-local oversight may be more cost effective. On the other hand with the transportation we have today we probably don’t need as many smaller political divisions because in the half hour a horse and buggy could travel a car can go 25+ miles.

    I liked the comment in the State of the Union address regarding the salmon being regulated by several different agencies whether in fresh water, salt water or smoked. But I understand how it is hard to decide which way to split responsibility: are we talking about the water or the fishing, the fishing pole or the net, or which kitchen they are cooked in?

    Is the government too big? It is if we can’t afford it. One thing Thomas Jefferson got right was what if the people got their hands in the cookie jar(the spending of tax monies), they would get fat(spending could get out of hand).
    What government do I need? A road is helpful. Parks are nice. Protection from invasion is helpful….no comment as to what is invading-I could do without the emerald ash borer. A way to settle our differences-peacefully. Some means by which I don’t gave to go to court to protect myself for every little thing- which means some regulations that create expected business practices and expected outcomes. But that is only me. You may have a different list.

    Education I can get for myself. But to expedite hiring employers have come to expect some kind of documentation of acquired knowledge. I have to have verification I am what I am from a third party. From birth certificate to residency we have to be documented. And we can’t get the life insurance without a document. One could say it is not government that is too big but one’s community is too big that we don’t rely on neighbors but government for structure. If I lived within my community, as for instance the Amish do for the most part, I would be known by my surroundings. But the community is not static as Tevya learned.

    As the moral thread comes slack, and there is less common experience, we no longer have the same common sense, people expect government to pick up the slack-protect them from people in need. Now some of that protection is to offer services we don’t have time to offer personally. For government to govern best by governing least we have to be self-limiting and fill in the holes ourselves. But I think we are uncomfortable by some things we have experienced or seen so we lose confidence because we lose trust.

    “Call this a govment! why, just look at it and see what it’s like…”

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  20. scratchy says:

    The answer is both.

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  21. Pete Klein says:

    Bret, just for the record and without disclosing actual numbers, the largest chunk out of my pay check goes to health insurance, the second largest goes to SS, the third largest goes to the Feds, the fourth largest goes to the state and medicare comes in fifth.
    Monthly expenses for my wife’s proscription drugs, even with health insurance, is a higher monthly expense than the cost of health insurance.
    In other words, no matter who is paying for health care and no matter how it is being paid, the grand total is obscene for all.
    If it weren’t for my wife’s needs, I would probably drop health insurance and take my chances. Then it would be wine, women and song until I kick the bucket and screw the health care industry.

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  22. Bret4207 says:

    Is the Federal Gov’t too big? I realize this is off on a tangent from pure financial concerns, but I think it’ illustrates that the Federal Gov’t is taking unprecedented steps to intrude into our lives and limit our freedoms. Considering what we’ve witnessed in Egypt, the thought that any US President might have the power to unilaterally “pull the plug” in American internet access, well, that’s troubling to say the least.

    [url]http://www.theblaze.com/stories/committee-passes-plan-for-internet-kill-switch-in-egypt-u-s/[/url]

    “Pending legislation that would grant the President of the United States the power to pull the plug on the country’s internet access in a declared “emergency” returned to the forefront this week on the same day Egyptians faced a nation-wide blackout designed to curtail widespread government protests. Egypt flipped it’s so-called “kill switch” — will the U.S.?

    The bipartisan bill is sponsored by Maine Sen. Susan Collins, the ranking Republican on the Homeland Security and Governmental Affairs Committee. The bill — called “The Protecting Cyberspace As A National Asset Act of 2010” S.3480 — was approved by a Senate panel this week.

    S. 3480 would create a new government agency called the National Center for Cybersecurity and Communications. The NCCC would have sweeping powers to control the Internet, including the ability to shut down the web for a 30-day period. Considering that at least 60% of Americans get their daily news fix from the Internet, this is a staggering proposal.”

    More at he link provided.

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  23. Pete Klein says:

    Well, Bret, we certainly don’t need another agency, especially this one. Time to rally around the Flag and the Internet.
    Just posted your link to my Twitter, Facebook and MySpace pages.
    I strongly believe freedom of the press does and should always include the Internet.
    I guess our so called leaders are just a bunch of cowards who seem to forget more often than not that they are our servants.

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