The upward revision in economic growth also means Uncle Sam’s share of the total economy is shrinking. This is despite much of the irresponsible spending enacted by President Clinton and the Republican Congress that I and others have railed against for years.
In 1991, federal spending as a share of GDP hit 23 percent. In 1999, it fell below 20 percent for the first time since 1974. Moreover, this year federal spending might fall below 19 percent of GDP, which will be the lowest level since President Lyndon Johnson’s Great Society was launched in 1965.
Milton Friedman has reminded us over the years that “the true cost of government is how much it spends.” Modern governments can best be thought of as a toll imposed on private-sector wealth-creating activity. Over the past 15 years that charge at the federal toll booth has fallen from almost 24 cents to about 19 cents on the dollar (see chart).
This is hardly a call for retreating from privatizing and downsizing government activities. There is still huge progress to be made in restoring government to its constitutional and economically optimal size. A recent booklet by the Institute for Policy Innovation on the growth of government shows that back at the start of this century the federal toll was less than 5 cents on the dollar. By my calculations, the historical average federal share of the economy was about 8 percent to 10 percent. So despite the recent progress, the federal government is still twice as big as it should be.
Moreover, overall spending isn’t falling at all. Over the past four years, the federal budget has expanded by more than $200 billion - during a time of peace and prosperity. Bill Clinton’s last budget had more than $150 billion in new spending requests over five years. The Republicans have made a habit of late of spending more money than even Mr. Clinton has requested.
The major factor behind the government’s retreat is that the private economy has been surging over the past 18 years. It appears that Ronald Reagan, Arthur Laffer and Jack Kemp saw the future with more clarity than anyone else in Washington: the American miracle economy is outgrowing the budget, rendering it gradually more inconsequential over time. This is a phenomenon that CNBC economist Lawrence Kudlow has described as “growing the denominator.” So even though the federal budget is now about 140 percent more obese than it was in 1982 when this record 18-year Reagan expansion (1982-99) began, the U.S. GDP has increased by an even more robust 185 percent.
With the right constellation of freedom and growth policies custom-designed for the high-tech, investor class age, the next president could very conceivably shrink the federal toll to between 10 cents and 15 cents on the dollar. Considering that the government toll charged in the still socialist or “third way” European economies falls in the 30 cents to 40 cents per dollar range, a 10 percent to 15 percent federal burden in the United States would create for American workers and firms an insurmountable comparative advantage in the global economy. That giant sucking sound would be trillions of dollars of investment capital from every corner of the globe pouring over the borders into the United States.
To get government down to between 10 percent and 15 percent of GDP by 2005 will require modest fiscal disciplinary measures to slow federal spending. We should immediately shut down the Commerce or Energy Departments, for example. We should finally pull the United States out of failed and corrupt institutions like the International Monetary Fund and World Bank. The private sector should take over activities like legal services for the poor, public broadcasting, space exploration, medical research, and making bank loans to small and minority-owned businesses.
Equally important, a prosperity agenda aimed at maintaining growth in the 3 percent to 4 percent range is imperative to shrinking government’s influence. Here Republicans in Congress need only plagiarize Steve Forbes’ bold economic playbook. Forbes proposals include: personalized accounts for Social Security, a postcard 17 percent flat tax, medical savings accounts as an alternative to government-run health care, a U.S. policy of expanded free trade, school choice for all children, and an iron-clad commitment to keep the internet forever tax and regulation free. All these together would virtually guarantee accelerated growth.
Skeptics will say we are simply living through a temporary pause in the relentless growth of government. They may ultimately be right. When Baby Boomers start signing up for Medicare and Social Security in about a decade, federal expenditures could easily double as a share of GDP. This makes it all the more imperative that we shrink government now, and find private sector alternatives to socialism for senior citizens.
We are now living in an global era aptly described by Walter Wriston as “the twilight of sovereignty.” Even Bill Clinton’s own “new Democrat” budget envisions federal spending dwindling down to 18 percent of GDP within the next five years. If congressional Republicans get back to promoting a genuine platform of freedom and limited government, we can even do better than that.
Stephen Moore is director of fiscal policy studies at the Cato Institute and president of the Club for Growth.
GOVERNMENT IN RETREAT Federal Spending as share of Gross Domestic Product. 2000 - 19.3% 1999 - 19.5% 1998 - 20% 1997 - 20% 1996 - 20.5% 1995 - 21% 1994 - 21.5% 1993 - 22% 1992 - 22.5% 1991 - 23%