What Am I Missing?

Steve Manacek · November 11, 2010 at 4:27am

The National Commission on Fiscal Responsibility and Reform has released its “co-chairs’ proposal” – the first shot across the bow, as it were, from the “Deficit Commission” that will likely define the terms of debate on fiscal policy for years to come. Initial reaction from Republicans (including Paul Ryan) and moderate Democrats has been fairly positive. Initial reaction from the Left has been far more negative; Nancy Pelosi was quick to call it “simply unacceptable.”

A lot of the introductory verbiage could have come straight from the mouth of Ronald Reagan (via the pen of Peter Robinson, no doubt) – “cut and invest to promote economic growth,” “cut spending we simply can’t afford, wherever we find it,” “reform and simplify the tax code – broaden base, lower rates, and bring down the deficit,” and so on. And there are pages and pages of more-or-less specific proposals, some more pleasing to conservatives, others to liberals.

But here’s what I don’t get about the initial reactions. Putting aside all the minutiae and detail, the crux of the proposal comes down to two points: capping federal government expenditures at 22% -- and eventually 21% -- of GDP, and capping revenues at 21% of GDP. And each of these represents a BIG problem. The first is on the spending side. Except for the anomalous stimulus/bailout/recession years of 2009-2011, federal government expenditures haven’t reached 21% of GDP since the collapse of the Soviet Union – and since World War II only exceeded 21% of GDP during the Reagan-Bush military buildup of the 1980s and early 90s. For virtually all of the Clinton and G.W. Bush years – and during all the Kennedy/Johnson/Nixon years – federal expenditures ranged between 18 and 20% of GDP. So while the 21% figure represents something of a cut versus the out-year projections of the President’s most recent budget, it leaves plenty of headroom to establish and make permanent even more government than we had in the immediate pre-Obama years.

The more important problem is on the revenue side. According to Office of Management and Budget figures, federal revenues have NEVER reached 21% of GDP. In fact, only in Bill Clinton’s final year in office – and during WW II – did revenues even exceed 20% of GDP. During the whole time from 1960 through 2008, federal tax revenues almost always fell between 17 and 19% of GDP, only occasionally rising above 19% (chiefly in Clinton’s second term) or below 17% (G. W. Bush’s first term). Even President Obama’s FY 11 Budget has federal revenues rising only to around 19% of GDP by 2015. So the 21% “cap” represents two full percentage points of GDP above what we have experienced even during historically “high” tax environments.

By way of comparison, the last time we had a “balanced” federal budget – FY 2001 – revenues were 19% of GDP and expenditures 18%. The Commission’s draft, in effect, proposes solving our deficit problem by allowing the federal government to grow 15-20% larger than it was under Bill Clinton, then raising taxes as much as necessary to pay for it. It institutionalizes President Obama’s expansion of the role of government – maybe not quite as much as he and Nancy Pelosi would like – and lays the burden squarely on the shoulders of American taxpayers.

I can understand the Left’s dismay (whether real or feigned) – at the very least, this proposal does seem to cut off avenues for additional government expansion beyond the explosion of the past two years, and may even trim the current trend line a bit. The Nancy Pelosi crowd, as always, wants MORE. But I am at a loss to understand even the moderately positive reactions of Ryan et al. If this becomes the starting point for discussion and negotiation, we are, as the first President Bush liked to say, in deep doo-doo. Am I missing something?

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