Our Dangerous Budget and What to Do About It

Georges de la Tour/Louvre, Paris

The December budget deal, worked out between Representative Paul Ryan and Senator Patty Murray, has been widely greeted with relief. Since the first days of the Obama Administration in 2009, Washington has been in a pitched battle over the budget, with endless fights over stimulus packages, temporary tax cuts, spending limits and sequestration, fiscal cliffs, debt ceilings, and government shutdowns. Who would not welcome a moment of bipartisan calm, especially when the economy still needs to break out of its prolonged torpor?

Yet the budget battles have never been quite what they’ve seemed, and the new bipartisan agreement is not a victory of bipartisan reason. Despite all of the budget turmoil over the past five years, the long-term trajectory of the US budget has remained remarkably and dangerously unaltered. With this new agreement, the US takes another step toward a diminished future.

The long-term budget trajectory is the combination of three trends. First, ever since Ronald Reagan’s successful assault on government, beginning in 1981 (“Government is not the solution to our problem; government is the problem”), federal tax revenues in a normal year have stabilized at around 18–20 percent of the Gross Domestic Product (GDP). Adding in state and local governments, the total tax take in the US is around 30 percent of GDP. In Canada, Europe, and Japan, the total tax take (national, state, and local) is at least several percentage points of GDP higher than in the US. Canada averages 38 percent, Germany 45 percent, and social democratic Denmark 55 percent. (Supporters of supply-side economics may be interested to learn that Denmark ranks as the happiest country in the world in the Gallup International polling of life satisfaction.)

Democrats are called the tax-and-spend party, but Bill Clinton, Barack Obama, and the congressional Democrats have consistently opposed proposals for any marked increase in federal revenues as a share of GDP. When Democrats fight their perennial battles to close loopholes and raise taxes on the rich, their proposals typically add up to around 1 percent of GDP at the maximum. Obama’s budgets since 2009 have consistently called for federal revenues below 20 percent of GDP as of 2020, not more. Remember that Obama called for making George Bush’s temporary tax cuts permanent for 98 percent of Americans, allowing possible increases only for the top 2 percent of income earners. In the deal made for the budget in January 2013—in response to the “fiscal cliff”—the Bush-era tax cuts were in fact made permanent for approximately 99.5 percent of households.

Second, outlays on major mandatory programs like Social Security, Medicare, and Medicaid have continued to rise relative to GDP. (These programs are called “mandatory” since the benefits are fixed by law rather than by annual appropriation.) Other notable mandatory programs include food stamps and unemployment insurance. In 1980, the mandatory programs cost 9.6 percent of GDP. By 2013, they…

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