Where's the small government?

By W. James Antle III
web posted March 20, 2000

Here's a stupid question: If the era of big government is over, why doesn't government get any smaller?

The federal government is currently taking more of the gross domestic product to fund its operations than it spent on an annual basis to fight World War II. The all-government tax take absorbed 25.6 per cent of GDP in 1943 compared to 31.5 per cent today. Bill Clinton, who pronounced the era of big government over in his 1996 State of the Union address, has presided over a 21 per cent real increase in federal spending. In nominal terms, the federal budget will grow somewhere between $800 billion and $850 billion over 1987's levels this year. The economy-wide marginal tax rate has grown from an average of 21.7 per cent under Reagan to 26.8 per cent under Clinton.

According to economist Stephen Moore of the Cato Institute, the federal government spends at least $125 billion monthly, as much as was spent in the first 50 years of the Republic, and in 1998 (under a Republican Congress) spent an amount equal to inflation-adjusted cumulative spending from 1787 to 1940.

So maybe a little belt-tightening is in order? After all, poverty is down so welfare costs shouldn't be that much, retirees' incomes are rising and they hold some 59 per cent of the nation's wealth so some gentle means-testing such as proposed by the late Paul Tsongas a few years back wouldn't hurt too badly, and at least $85 billion in corporate welfare can be sliced from the budget.

On top of this vast expanse of federal expenditure, which annually exceeds the German GDP and will pass $20 trillion over the next decade, federal coffers are awash in new revenues. The surplus may be as large as $4 trillion in the next ten years. A small tax cut, amounting to as little as 3 or 4 per cent of anticipated tax collections, couldn't hurt, could it? We could stop forcing married couples to pay higher taxes, or raise the income level at which the 15 per cent tax bracket applies, or ease the punitive tax burden on Americans who continue to work after the age of 65. Considering we could probably "afford" x (to borrow the statists' formulation) broader tax reform such as implementing the flat tax, these smaller tax breaks would do concrete good without breaking the bank.

Don't hold your breath waiting for such an outburst of fiscal sanity. The Clinton administration has once again trotted out its mantra of "risky tax schemes" to block congressional proposals to cut taxes. The premise of the Democratic argument is that every penny of government spending is absolutely necessary, and to prevent one penny from ever having to be cut we must keep every penny of federal tax receipts - even if, as is now the case, these receipts actually outstrip spending itself.

Bill Clinton argues that even the most halfhearted and pathetic Republican tax cut will "blow a hole in the surplus" (he used to say deficit - apparently, there is no budgetary scenario in which tax cuts are feasible) and turn aside "the fiscal discipline that has given us the longest economic expansion in history."

Rubbish. First, note that Clinton defines "fiscal discipline" as opposing any cut in domestic spending (he specifically invokes education, Medicare, Social Security and the environment) and keeping taxes high enough to pay for it. Higher levels of spending are never irresponsible, only tax cuts which may diminish the revenues - or worse, public support - available to that spending. Secondly, fiscal discipline did not produce the current expansion. Precisely the opposite is the case: The economic expansion swelled revenues to the point that we are now enjoying a surplus without any scaling-back of a major function of government, enabling us to have the appearance of fiscal discipline.

Consider that the deficit exploded to $290 billion during the 1990-91 recession and we had triple-digit deficits during most of Clinton's first term, when annual economic growth averaged 2.6 per cent. As growth accelerated to 4 per cent, the deficit vanished. The longer growth was sustained, as even Congressional Budget Office analysis shows, the more revenues shot up and gave us the present surplus. Tax cuts even helped this process: The 1997 capital-gains tax cut helped goose growth rates up and boost revenues by some 40 per cent.

Insofar as fiscal discipline did play a role in the creation of the surplus, it was tight restrictions on spending that achieved this. Defense spending cuts total some $130 billion. Moreover, the one positive aspect of President George Bush's 1990 budget agreement was that in exchange for the disastrous tax increase he won some restrictions on discretionary spending. The pay-as-you-go budget rules forced any increase in discretionary spending to be matched by an equal cut (or tax increase) elsewhere in the discretionary budget. These rules were largely continued by the early Clinton administration, with the positive result of keeping discretionary spending in a straightjacket. Plus during the deficit days, the Republican Congress cut Clinton's non-defense budget, by $56 billion in 1996 alone.

None of these conditions apply today. The pay-as-you-go rules are no longer being observed. Congress is now trying to outspend Clinton rather than cut his budget proposals, outspending Clinton's request by $5 billion in 1998 alone. The GOP gave Clinton more than he asked for in education spending. Even defense spending is on the rise again. The lack of the deficit robbed the Republicans of their most politically powerful argument against the expansion of government, and government is correspondingly expanding. The surplus is now entirely dependent on sustained economic growth.

Good economic times do not necessarily roll forever. Despite a colossal potential for growth in this new Internet economy, the US is still vulnerable to external shocks and bad policy. OPEC has shown itself to have the capacity for the former and on the latter front there are storm clouds on the horizon as well. Rather than relying on enhanced output expedited by lower marginal rates and deregulation, we are increasingly trying to coax growth via easy credit to induce consumption. In order to inoculate us against the "Asian flu," the Federal Reserve (much praised today for its forbearance, but we should remember that it is the same entity that gave us 1970s "stagflation" and the Great Depression) has dramatically and unwisely expanded the money supply. This in turn has fueled stock-market speculation and the hyperinflation of certain stock prices that beg for a correction, and may well be the cause of recent market volatility.

Lower taxation thus is the best insurance policy against the interruption of our economic growth. This means that reducing the government's grab at our income will actually preserve the conditions which make our surplus possible. Yet right now we can't achieve these tax cuts because of the fear that some budget cut may be required. Imbalances in Medicare and Social Security, high taxes and budget deficits are all a derivative problem of excessive federal spending. All of the above problems loom as long as spending remains out of control.

Exercising this budgetary control, however, is another matter in an America where roughly 34.7 per cent of the population is dependent on government for all or most of their income. Most federal spending is beyond the control of this and any likely future president and Congress. Which just goes to show that by ignoring the Constitution's constraints on government we have limited our public-policy options more sharply than had we observed them. The lesson that limited government brings greater freedom desperately needs to be learned.

W. James Antle III has worked for the Rhema Group, an Ohio-based political consulting firm. You can e-mail him at Jimantle@aol.com

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