Right-Sizing the Federal Government

From Mark Fernald

Republicans argue that the Federal government is too big. Democrats
argue that revenues are too low. The fight is over money, but the real
debate is over the size and scope of the government.

Before we line up on one side or the other, we should look at recent

Over the past forty years, federal spending has averaged a little over
20% of Gross Domestic Product (GDP). When the economy has been strong,
federal spending as a percentage of GDP has dipped below 20%. When the
economy has been weaker, that figure has been several points higher.
[1] <http://www.whitehouse.gov/omb/budget/Historicals>

During the same forty years, federal revenues have averaged about 18%
of GDP. As a result, the federal government was in deficit for all but
three of those years.

During the Clinton budget years (1994-2001), federal outlays as a
percentage of GDP declined from 21% to 18.2%. During the following
eight Bush budget years (2002-2009), that percentage rose from 19.1%
to 25.2%, as the Great Recession, and spending for two wars and
Medicare drug coverage, all had an effect. (The Obama stimulus
increased spending by 1.5% of GDP.) [2]

During the Obama budget years that have been completed (2010-2012),
spending as a percentage of GDP was 24.1%, 24.1%, and 22.9%, while
revenues as a percentage of GDP have been 15.1%, 15.4% and 15.8%

As the economy improves, the gap between spending and revenues will
narrow, but there will continue to be a significant gap.

Social Security and Medicare are not part of our current deficit
problem. Revenues for those programs are about equal to spending. As
the retirement of the baby boomers continues, expenses will rise
faster than revenues, and those programs will have to use their
reserves. Medicare is projected to exhaust its reserves and be unable
to pay all its bills in 2024 [3]
while Social Security is projected to exhaust its reserves and be
unable to pay full benefits in 2033. [4]

By 2040, Medicare costs are projected to increase from 3.7% of GDP to
6% of GDP. Social Security will increase from 4.9% of GDP to 6.4% of
GDP in 2035. [5]

If we are to keep our promises to seniors, the federal budget,
relative to GDP, will have to increase by several percentage points.

Republicans have other ideas. In 2011, every Republican in the Senate
voted for a constitutional amendment that would mandate a balanced
budget, and that would limit federal spending to 18% of GDP. [6]
If implemented, this amendment would require huge cuts in Social
Security and Medicare, or huge cuts in everything else, or a cut of
17% across the board–seven times as large as the sequester.

The goal of the Republican Party is to reduce the federal government
to a size we have not seen since before the days of Medicare,
Medicaid, the EPA, food stamps, Head Start, and student loans. Do we
really want to go back to those days?

There are alternatives. Cuts can be made to eliminate federal subsides
for agribusiness, ethanol, and fossil fuels. The defense budget can be
cut by eliminating weapons the Pentagon does not want, and by bringing
home troops that are stationed in countries that no longer need our
military assistance.

On the revenue side, we could eliminate special tax rates for hedge
fund managers and investment income, enact a financial transaction tax
(both to raise revenue and cut speculation in the stock market), and
limit or eliminate deductions for luxuries, such as the mortgage
interest deduction on second homes and mansions.

These changes would reduce the deficit by hundreds of billions of
dollars a year.

Changes are also needed for Social Security and Medicare so that they
can be self-sustaining programs in the long term. A balanced approach
of revenue increases and benefits adjustments makes sense to
many–unless you are a Republican sworn to oppose all tax increases,
which then leaves only benefit cuts.

It’s budget season in Washington. The media will focus on the clash
between the parties. You should look for the alternate visions of the

Democrats want to gradually decrease spending, and increase revenue,
so that the two balance somewhere near 21% of GDP. Republicans want to
radically change the scope and mission of the federal government,
reducing it to a size not seen in a couple generations.

You get to weigh in again on election day, 2014.

/Mark Fernald was the Democratic nominee for Governor in 2002. He can
be reached at //mark@markfernald.com/ <mailto:mark@markfernald.com>
/. This column, with supporting footnotes, can be found at
//www.markfernald.com/ <http://www.markfernald.com>

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