When it comes to federal spending, $85 billion is a drop in the bucket. Howls can be heard over the mere suggestion that outlays might be reduced by this amount through sequestration. The concern is overblown, as we’re only talking about 2 percent of a $3.8 trillion budget.
The blame for Uncle Sam’s present financial difficulties falls squarely on the uncontrolled increase in spending, not a dearth of revenue, as a recent study by St. Louis Federal Reserve Vice President Daniel L. Thornton explains in exhaustive detail. From 1840 to the mid-20th century, the federal budget remained roughly in balance, with deficits during times of crisis, like the Civil War and the Great Depression, being offset by surpluses as times got better. Even as recently as the time between 1950 and 1969, expenditures averaged about 18 percent of gross domestic product (GDP) while revenue came in at 17.5 percent. A growing economy could easily fund this modest deficit.
As Mr. Thornton points out, the real break from fiscal prudence happened in the 1970s. Between 1970 and 2007, spending jumped to an average of close to 21 percent of GDP, while revenues rose to around 18 percent of GDP. Most recently, spending has hit 24 percent of GDP. Raising taxes to match a spending peak of that magnitude would devastate the private economy.
Social Security, Medicare and Medicaid are the biggest culprits in the spending spike. These entitlements were responsible for about 5 percent of federal spending in 1950, a figure that jumped to almost 16 percent in 2010, becoming the single largest outlay. More broadly, mandatory spending jumped from 44 percent of all spending in 1979 to 56 percent in 2011. This is why entitlement reform must be part of any true deficit reduction package.
We’re not in debt merely because of the financial crisis that began a few years ago. Its the proliferation of federal programs that transfer dollars from Peter to Paul that have put the books so far out of balance.
To correct the situation, across-the-board cuts may prove to be the most politically palatable option. Instead of disproportionately targeting defense, all programs should see an equal reduction. This would be seen as a more fair process that is less subject to special-interest manipulation.
As the Congressional Budget Office has noted many times, America’s current path is unsustainable. The $85 billion sequestration isn’t even close to the amount needed to restore balance in Washington, but it’s a start.
Nita Ghei is a contributing Opinion writer for The Washington Times and Policy Research Editor at the Mercatus Center.