What Small Government Really Looks Like: Not a Pretty Picture!

Once upon a time, America had a small government.

Before World War I, government spending was less than 10 percent of the economy. During the Great Depression, it reached 20 percent. By 1960, it hit 30 percent. And so, for the past fifty years, one in every three dollars spent in America were spent by Uncle Sam.

In 2012, the Republican presidential candidates have staked their campaigns on a promise to reverse this trend. Many Republicans openly pine for the good old days of rugged individualism — the days before Social Security and Medicare, before the FDA and the EPA, before income taxes and government-backed mortgages.

You might think that such an extreme position belongs to rabble-rousers like Glenn Beck but not mainstream pragmatists like Mitt Romney. You’d be wrong.

Candidate Romney has proposed cutting taxes annually by $180 billion, mostly for the top 1 percent of income earners. At the same time, he has pledged to balance the budget without cutting defense spending. According to the Center on Budget and Policy Priorities, the only way to fulfill all these promises is to cut nondefense programs by 50 percent.

In other words, Romney wants to get rid of half of everything the government does, except Social Security and the military.

Half of our schools. Half of our national parks. Half of our federal law enforcement. Half of our food safety. Half of our clean air. Half of our veterans’ health care. Gone. Forever.

And Romney is no exception. If anything, his proposal is tame in comparison. Newt Gingrich’s proposal, for example, would cut taxes by $850 billion. You can just imagine the carnage.

In Tuesday night’s State of the Union address, President Obama staked out the opposite position, asking Congress to raise taxes slightly on millionaires and to use half the savings from ending the wars in Iraq and Afghanistan to reduce the budget deficit. The other half he pledged to public infrastructure projects.

And not a moment too soon.

Over the last fifty years, infrastructure spending has steadily fallen as a share of the economy. We now spend 2.4 percent of GDP on transport and water infrastructure, compared to 5 percent in Europe and 9 percent in China.

According to government reports, one in four bridges need significant repairs or are bearing more traffic than they were designed for. 700 water pipes burst every day because they’ve worn out. One in three roads are in substandard condition, increasing traffic fatalities, congestion, and gas emissions. 1,300 dams have been designated “high-hazard,” meaning they could fail and result in fatalities. We spend $50.6 billion every year just to clean up spills from old sewage systems.

In recent years, state and local governments, which contribute the vast majority of infrastructure spending, have shrunk significantly in the wake of unprecedented budget shortfalls. The federal government needs to step up, but the Republican candidates would rather scale down.

There will never be a better time to rebuild our infrastructure. Millions of Americans desperately need jobs. The government can borrow at near-zero interest rates.

We’ve been here before.

In 1935, with unemployment at 20 percent, the government created the Works Progress Administration. Over the next eight years, the WPA provided eight million jobs. It built or renovated 560,000 miles of roads, 20,000 miles of water pipes, 417 dams, 2,700 firehouses, 5,000 schools, 1,800 hospitals, 2,000 stadiums, 1,800 runways, and 6,000 fire and forest trails. By 1941, before the United States entered World War II, unemployment had fallen to 6 percent.

We can do it again.

Or we can go back to the nineteenth century. We can go back to a world without paved roads or bridges or clean water, with one-room schoolhouses spaced many miles apart and hospitals that took hours to reach. We can go back to the days when sewage was untreated and floods overwhelmed many towns, when recessions were more frequent and unemployment rose more sharply.

We can go back to small government, if we’re willing to give up our way of life.

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This op-ed was published in today’s South Florida Sun-Sentinel.

Reader Request: Do Lower Tax Rates Lead to Higher Tax Revenue?

A reader asks: If low tax rates lower income to the Treasury and cause deficits and lower economic growth, how do you explain how we ran deficits with a 70 percent top marginal tax rate in the 1970s and we ran surpluses for 1998-2001 with a 39 percent top marginal tax rate with almost identical average GDP growth for the periods? Doesn’t this fact give significant credence to the supply-side argument that lower tax rates increase tax revenue and cause surpluses?

Professor Chandra Mishra made roughly the same argument in our debate over the Bush tax cuts. I didn’t address it in my op-ed because I didn’t expect a tenured professor to advocate such a widely discredited position.

First, a clarification: I never said that “low tax rates…cause…lower economic growth.” On the contrary, the economic evidence indicates that tax cuts have a slightly positive effect in the short run.

In order for tax cuts to increase tax revenue, however, they would have to have such a large effect on economic growth that it outweighs the effect of the lower rates. Taking a smaller percent of a bigger number can yield more than taking a bigger percent of a smaller number, given the right numbers. At a certain point, if you keep raising taxes, people will stop working because it isn’t worth the effort. If enough people stop working, economic output decreases, and tax revenue shrinks despite higher rates. If you like graphs, you can visualize that “tipping point” as the top of the “Laffer curve,” named after economist Arthur Laffer who helped popularize the concept in the 1970s:   Continue reading “Reader Request: Do Lower Tax Rates Lead to Higher Tax Revenue?”

$63 Billion? Chump Change!

When Professor Mishra and I debated the Bush tax cuts last week, he made the following point:

Should we let the Bush tax cuts expire for those who earn more than $200,000, in order to rein in the current budget deficits, at an all-time high, to pay for government spending? It would bring in revenue of only $630 billion over the next 10 years, according to the Office of Management and Budget.

In other words, we have a chance to reduce the budget deficit by $63 billion per year, but we shouldn’t do it. Not because anything bad would happen. Just because it’s “only” $63 billion.

“Because it’s too small” is not a good reason. There is no magic bullet. If you’re looking for an economically neutral way to cut $1.3 trillion all at once, it doesn’t exist. You cut $50 billion here, you raise $100 billion there, and eventually you’ve reduced the deficit significantly.   Continue reading “$63 Billion? Chump Change!”