The question that President Obama ought to be asking—that we all should be asking—is this: how big a government do we want? Without any-one much noticing, our national government is on the verge of a permanent expansion that would endure long after the present economic crisis has (presumably) passed and that would exceed anything ever experienced in peacetime. This expansion may not be good for us, but we are not contemplating the adverse consequences or how we might minimize them.
We face an unprecedented collision between Americans' desire for more government services and their almost equal unwillingness to be taxed. The conflict is obscured and deferred by today's depressed economy, which has given license to all manner of emergency programs, but its dimensions cannot be doubted. A new report from the Congressional Budget Office ("The Long-Term Budget Outlook") makes that crystal-clear. The easiest way to measure the size of government is to compare the federal budget with the overall economy, or gross domestic product (GDP). The CBO's estimates are daunting.
For the past half century, federal spending has averaged about 20 percent of GDP, federal taxes about 18 percent of GDP, and the budget deficit 2 percent of GDP. The CBO projection for 2020—which assumes the economy has returned to "full employment"—puts spending at 26 percent of GDP, taxes at a bit less than 19 percent of GDP, and a deficit above 7 percent of GDP. Future spending and deficit figures continue to grow after 2020.
What this means is that balancing the budget in 2020 would require a tax increase of almost 50 percent from the past half century's average. To get from 18 to 26 percent of GDP (spending in 2020) would require another 8 percent of GDP in taxes. In today's dollars, that would be about $1.1 trillion, a 44 percent annual tax increase. Even these figures may be optimistic, because the CBO's projections for defense and "nondefense discretionary spending" may be unrealistically low. This last category covers everything from environmental regulation to aid to education to homeland security.
Whatever the case, the major causes of the budget blowout are well known: an aging population and rapid increases in health spending. In 2000, Social Security, Medicare, and Medicaid—the main programs providing income and health care for the 65-and-older population—totaled nearly 8 percent of GDP. In 2020, the CBO projects that will reach almost 12 percent of GDP and continue to increase. But the deeper source of our predicament is a self--indulgent political culture that avoids a rigorous discussion of government's role.
Everyone favors benefits and opposes burdens (taxes). Republicans want to cut taxes without cutting spending. Democrats want to increase spending without increasing taxes, except on the rich. The differences between the parties are shades of gray. Hardly anyone asks the hard questions of who doesn't need benefits, which programs are expendable, and what taxes might best cover remaining deficits.
What long sustained this system was falling defense spending and routine, though usually modest, deficits. As defense declined—from 9 percent of GDP in the late 1960s to 3 percent in 2000—social spending could rise without big tax increases. Deficits provided extra leeway. But these expedients have exhausted them-selves. Deficits have risen to alarming proportions, and in a risky world, defense cannot drop indefinitely.
Obama would make matters worse. He talks about controlling "entitlement" spend-ing (mainly Social Security and Medicare) but hasn't done so. He's proposing just the opposite. His health-care proposal would increase federal spending. He says he will "pay for" the added outlays with tax increases or other spending cuts, but what people forget is that every penny of this "payment" could be used (and should be) to close the existing long-term deficit—not raise future spending and taxes.
The latest excuse for avoidance is the economic crisis. True, deep spending cuts or tax increases would be undesirable now; they would further depress a depressed economy. But that doesn't preclude action. Changes could be legislated now that would begin later and be phased in—a gradual increase in eligibility ages for Social Security and Medicare; gradual increases in energy taxes; gradual elimination of some programs. Such steps might improve confidence by reducing uncertainty about huge deficits.
There is little appetite for any of this, and so we face the consequences of much bigger government. Certainly higher taxes for future Americans. Probably a less robust economy. The CBO notes that elevated deficits would penalize saving, investment, and income, while unprecedented tax burdens could "slow growth in the economy, making the [government's] spending burden harder to bear." To such warnings, Americans' response is: go away.