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.