Forget deficits -- think government grab
By Peter Brimelow & Ed Rubenstein,
Last Update: 12:01 AM ET Oct. 27, 2004
NEW YORK (CBS.MW) -- We have it on the word of Vice President Cheney that federal budget deficits don't matter -- Reagan proved that. Cheney'd better be right.
We don't focus on deficits either, but for a different reason.
We are interested in Nobel economics laureate Milton Friedman's contention that
what matters is not the deficit in itself, but the total burden of government on the economy -- federal spending relative to the gross domestic product.
After all, either by taxing or borrowing, the government is grabbing Americans' money.
Both methods of financing the deficit mean misallocation and distortion.
The bad news: the federal government grab is increasing.
This is illustrated in the chart below.
Rote schrift - rote Kurve
Blaue Schrift - blaue Kurve
The red line on the chart is federal spending. It has ticked up sharply during the Bush administration, reversing nearly two decades of decline. In 2004, it has reached 20 percent of GDP.
And (surprise!) the federal spending uptick is not entirely because of defense spending. That's up, too, but about a third of the increase is non-defense. Washington is spending more regardless of Iraq.
Simultaneously, state and local government spending also increased, from 12.1 percent of GDP in 2000 to 14.5 percent in the middle of this year.)
Of course, the really radical development on this chart is the collapse of federal revenues, from 20.9 percent of GDP in 2000 to 16.4 percent in 2004.
Much of this is due to a dramatic reduction in income tax receipts. These were 9.3 percent of GDP in 2000; they are down to 6.4 percent in 2004.
Corporate income tax receipts are also down, from 2.4 percent of GDP in 2000 to 1.5 percent in 2004.
Not all of this is due to the Bush administration's tax cuts. There has been a recession, and a prolonged period of slow growth.
That meant lower profits and higher unemployment -- and fewer targets for taxation.
It is possible to be optimistic about these Bush budget developments.
The increased deficit must have some stimulation effect, in a Keynesian sense.
The reduced income tax must have some incentive effect, in an Art Laffer/supply-side sense.
But just contemplating this chart creates a real sense of wonder at the scale of the Bush administration's gamble.
In sheer magnitude, its spending increases match and its tax cuts exceed those of the Reagan administration.
But Reagan was fighting the Cold War, stagflation and high marginal tax rates caused by years of bracket-creep -- years of unlegislated tax increases resulting from inflation pushing people into higher income tax brackets without increasing their real pay.
It's a serious question whether Bush faced anything comparable.
One thing that is clear, however: the government grab is once again increasing.