Right-Sizing the Federal Government

Washington is trapped in an endless fiscal debate.  Republicans argue that the Federal government is too big.  Democrats argue that revenues are too low.  The fight is over money, but the larger 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 history.

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]

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.

This fluctuation is to be expected.  When times are tough, spending increases for safety net programs, such as Medicaid, food stamps, and unemployment benefits.  The opposite happens when the economy booms, such as in the 1990s.

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

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 surpluses to maintain benefits.  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 our seniors, the size of 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.  Such a cut would be seven times as large as the sequester.

The 2012 Republican Party platform also included a call for a constitutional amendment limiting federal spending to a fixed percentage of GDP. [7]

The goal of the Republican Party is to reduce the size of 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 homes 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 (which will raise revenue and cut down on 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 parties.

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