Sorry, Folks, We Don't Just Have 'A Spending Problem'

Federal spending and revenue as a per cent of GDPFederal government spending (red) vs. tax revenue (blue)

Photo: Business Insider, St. Louis Fed

Yesterday, I pointed out how, in a stubborn attempt to avoid raising taxes on the richest 2% of Americans, the Republicans in Congress have essentially agreed to raise taxes on everyone.The Republicans have done this by refusing to accept President Obama’s attempt at a compromise, which preserves low tax rates for 98% of the country while raising taxes modestly on the top 2%.

Well, you can’t assign blame to the formerly pragmatic and responsible Republican party without getting some flak.

So I received some notes explaining that the Republicans were absolutely right to reject Obama’s plan because “our problem is not a tax problem—it’s a spending problem.”

And you know what, Democrats? The writers of those notes were partially correct:

We DO have a spending problem.

If we are ever to get our budget deficit under control, we need to trim long-term spending growth.

But blaming the whole deficit problem on “spending” ignores the other half of the problem: Taxes.

Our federal tax revenue right now is historically low.

To begin to address our deficit problem, therefore, we need to trim spending growth and increase taxes.

Don’t believe it?

In recent years, the federal government has developed a huge budget deficit. This is because federal spending (red) has surged, while federal tax revenue (blue) has stagnated.

Put those two together, and it's no mystery why we've developed such a budget deficit in recent years.

The good news is... the solution is obvious. We have to raise taxes as a per cent of GDP (blue) and/or cut spending as a per cent of GDP (red).

How, exactly, should we do that? Well, given that there are 320 million of us who have to agree, we should probably compromise: A little of both.

But, before we go jacking up taxes and cutting spending willy-nilly, we need to understand that there are two kinds of government spending...

The first kind is what we normally think of as government spending: defence, highways, bridges, NASA, government employee salaries, etc.

Which kind of government spending do you think is bigger?

Over the past 50 years, social-program spending has exploded as a percentage of the economy.

Social program spending (red) has grown so much, in fact, that it now consumes almost all federal tax revenue (blue).

Meanwhile, the OTHER kind of government spending--highways, military, federal salaries, etc.--has actually been shrinking as a per cent of the economy.

Even Military spending--the other big federal expenditure behind Social Security and Medicare/Medicaid--has been shrinking as a per cent of the economy.

The real government budget busters are Social Security, Medicare, and Medicaid.

So, do we have to get Healthcare and Social Security spending under control? You'd better believe we do. If we don't, we're toast.

But! Before you cheer on Congress-people who just want to whack Social Security and Medicare/Medicaid spending, remember this...

Our economy has become highly dependent on these social programs. They now amount to a record 16% of GDP. If we suddenly slashed them, especially while raising taxes, we would give the economy a heart attack.

So we need to fix our social programs gradually, calmly--not in a fit of panic that will throw us into a Depression.

It took us 30 years to get into this mess. (Debt = red, GDP = blue). It will probably take us 30 years to get out.

So now you know the truth about our government. But there are other things you should read about, too...

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