The Cuts That Weren’t

The commission “tells working Americans to drop dead,” said AFL-CIO president Richard Trumka. “Unconscionable,” says Rep. Jan Schakowsky (D., Ill.), one of the commissioners who voted against the final report. “Unacceptable,” declared outgoing House speaker Nancy Pelosi.

In reality, the commission report doesn’t go nearly far enough in reducing the size, cost, and intrusiveness of government. As a matter of fact, the commission doesn’t actually “cut” federal spending.

Under the commission’s proposal, government spending would rise from roughly $3.5 trillion today to more than $5 trillion by 2020. So, under the terrible “cuts” that the commission is recommending, federal spending would still increase faster than inflation. This is the old Washington game of calling a slower increase than previously projected a “cut.”

Of course, because the size of the economy will grow over time, the commission’s proposals would mean that government spending would fall from 24.3 percent of GDP today to 21.8 percent over the next 15 years. That’s a good start. In fact, if we fail to act, federal spending is projected to consume as much as 43 percent of GDP by 2050. Think of that: Nearly half of everything produced in this country would be consumed by the government.

Even here, the commission’s recommendations are extremely modest. As recently as Bill Clinton’s presidency, total federal spending was just 18.4 percent of GDP — and people were hardly dying in the streets during the Clinton years.

Of course, in the years since Clinton was president, we have seen two of the most profligate presidencies in modern history. But that shouldn’t mean that we are forever cursed with a government of the size we have today.

Ultimately, the commission falls short because it fails to address the proper role of government. In fact, it tacitly accepts the idea that government should be doing everything it is doing now. It even acquiesces to the new health-care law. And, because the commission fails to make the type of deep cuts necessary to return spending to historically sustainable levels, it is forced to rely on tax hikes to make up the difference.

Much of establishment Washington is up in arms today because of the “cost” of the deal continuing the Bush tax cuts. One can debate the impact that keeping the current tax rates in place would have on the deficit, but if spending were brought down to Clintonian levels, we could more than accommodate an extension of the tax cuts. Nor would it then be necessary to raise the gas tax, the payroll tax, or other taxes as the commission envisions.

In fairness, many of the commission’s tax proposals, such as closing loopholes and eliminating economically distorting deductions in exchange for lower rates, are something that should be seriously considered in the context of tax reform. But history suggests that Congress is likely to simply pocket any increased revenue and keep spending. A new study by economists at Ohio State University, for example, found that since World War II every dollar of increased federal tax revenue resulted in $1.17 of increased federal spending. And last week the Senate showed that it couldn’t even bring itself to ban earmarks.

It is true that “starving the beast” by cutting taxes has done little to control government spending, but feeding the beast hardly seems likely to be a more efficacious approach.

In the end, we need to remember the deficit is a symptom, not the disease. As Milton Friedman often explained, the real issue is not how you pay for government spending — debt or taxes — but the spending itself.

Despite this fatal flaw, the commission has performed a valuable service. It has shown us the true size and danger of the problem we are facing. And it has shown us that so far few politicians from either party are truly serious about rolling back the size of government.