Budget Bloat Hides Good News About Spending

This article appeared in the Wall Street Journal, November 23, 1999.
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The outcome of this year's budget battle could hardly have been more disappointing. "Probably 95% of what Clinton wanted, he got," lamented Sen. Arlen Specter of Pennsylvania. Mr. Specter's fellow Republicans then added billions more for themselves. Result: a pork-filled budget of $1.75 trillion, bigger than the entire economy of France.

Economy Outpaces Spending

But here's some surprising news: The federal government is getting smaller, at least relative to the size of the economy as a whole. This year, for the first time in more than 25 years, federal spending slipped below 20% of gross domestic product. As the chart nearby shows, this percentage has been shrinking throughout the 1990s; it is projected at 19.3% next year. That's still too big, but it's down from 24% just 15 years ago. True, much of this progress is a result of post-Cold War defense cutbacks, but even domestic spending is receding relative to private-sector output.

This benign fiscal state of affairs seemsincomprehensible, given a Congress that has proved itself incapable of cutting nearly anyfederal agency budgets and a president who has stopped paying even lip serviceto small government. But America's miracle economy, helped alongby Ronald Reagan and Jack Kemp's supply-side tax policies, isoutgrowing the budget. The federal budget has grown by 132% in 1982, butthe GDP has increased by 176%. And Americans' financial wealth hasgrown to $32 trillion from $7 trillion, four times as fast as federalexpenditures. The trend has been quite different for most of the 20th century.Federal spending as a share of GDP rose to 24% in 1982 from 4% in 1932.

Who gets credit for turning things around? First, Mr.Reagan, who won the Cold War, chopped punitive tax rates roughly in half andmade the case that big government was the problem, not the solution.Second, Paul Volcker and his successor, Alan Greenspan, who endeddouble-digit inflation and returned America to price stability. Third,Bill Gates, Andy Grove, Steve Jobs, Steve Case and all the other high-techentrepreneurs who made possible today's booming information economy.

All this progress has happened without any serious effortto cut federal spending. If the next president adopts the rightsmall-government policies, he could shrink federal spending to 15% or even 10% ofGDP. To get there will require a combination of modest fiscaldisciplinary measures to slow federal spending and a prosperity agenda aimed atcoaxing economic growth up to 4% or 5% a year. The policy prescriptionsnecessary include: personalized accounts for Social Security, a flat 20%alternative maximum tax with unlimited IRAs, medical savings accounts forhealth care, unilateral free trade, the abolition of corporate welfare and anironclad commitment to keep the Internet tax- and regulation-free.

"The natural progress of things is for government to gainground and liberty to yield," Thomas Jefferson observed in 1788. Today,however, liberty is growing faster than government. Perhaps this will proveto be a historical anomaly. But probably not. To an unprecedented extent,the information economy is not dependent on government and not easilysubjected to wealth-redistribution schemes, welfare-state expansionismor confiscatory tax policies. Still skeptical? Consider this: Even BillClinton's budget envisions federal spending dwindling to 18% of GDP withinthe next five years.