In the argument over the "sequester," the across-the-board cuts to both domestic and military programs that are about to take effect, everyone in official Washington seems to agree that the government's budget is bloated. Despite the economists telling us that this is still a terrible time for austerity (just look how well it has worked out for Europe), the argument between Republicans and Democrats seems to be whether we need to just slash the budget mercilessly, or slash the budget somewhat less and raise some taxes. But is the federal budget really so big? Let's take a look at some graphs.
If you look just at raw dollars, it's true that the size of government has increased steadily in recent decades (there are a lot of reasons why that's the case). It's also true that spending went up at the beginning of the Obama administration, but it's important to understand why and how. The answer to why is simple: the Great Recession. When a recession hits, government spending on safety net programs like unemployment insurance, food stamps, and Medicaid will automatically go up as more Americans need help. In addition, Obama's first year saw passage of the Recovery Act, which infused hundreds of billions of dollars into the economy. As the Recovery Act money was spent and the economy began to recover, spending went down. In fact, 2010 was the first year since 1965 that the federal government spent less in nominal dollars than it had the year before. And 2012 was the second such year.
But simple dollar amounts can be deceptive. Federal spending as a proportion of GDP gives us a clearer picture of how government has grown over time, but it also can exaggerate the effect of short-term changes in the economy. When a recession hits and GDP contracts, government's share goes up even if it doesn't spend a dollar more. Likewise, when the economy booms, government can spend the same or more and show a declining share of GDP. So in 2009, in the midst of the Great Recession, federal spending peaked at 25.2 percent of GDP, then declined to 24.1 percent in 2010 and 2011, declined again to 22.8 percent last year, and is projected by the CBO to be 22.2 percent this year. As a point of comparison, spending during the presidency of Ronald Reagan averaged 22.4 percent.
In the debates we're currently having over the budget, there are four large components of government spending that usually get discussed: Social Security, Medicare, defense, and nondefense discretionary spending (there are also other components, like interest payments, but we'll stick to these four for now). Between them, spending on the military, Medicare, and Social Security now account for over half the federal budget, which is why it's sometimes jokingly said that the U.S. government is basically a retirement program with a very large army. But look over time and you can see how things have changed. In the 1960s, the military accounted for almost half the federal budget; coming out of Vietnam, military spending went down, then back up again during the Reagan buildup, then down again under Clinton, and back up under George W. Bush. Throughout that time, Social Security and Medicare took up increasing portions of the budget, and will account for even more during the Baby Boomers' retirement.
But what's being cut most in the current mania for cutting is nondefense discretionary programs, which essentially means everything the government does outside the military and entitlements like Social Security and Medicare. That's education, transportation, law enforcement, medical research, and a thousand other things. And they've already been cut substantially. The Budget Control Act that President Obama signed in August 2011 made cuts to nondefense discretionary spending amounting to $740 billion over ten years. This means that under current law, as we get into the 2020's, nondefense discretionary spending is slated to slip below 3 percent of GDP, lower than it has been in the last half-century. If the sequester fully takes effect, the cuts will be even deeper, pushing the total over $1 trillion cut from nondefense discretionary programs in the next decade.
All that doesn't account for state and local spending, which took a particularly hard hit during the recession, contracting for 11 straight quarters. As The New York Times recently noted, "Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II." When you add together what government at all levels spends in America, it comes to around 40 percent of GDP, which puts us at the low end among advanced industrialized democracies.
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