Any attempt to address long-term federal budget deficits will require answering some big, fundamental questions. How much spending is enough? How much revenue is too much? Usually, the answers to these questions are couched in terms of a share of the wider economy. In other words, how much of our combined national income do we want the government to spend? And therefore, assuming we want a balanced budget, how much of our income are we willing to pay in taxes?
Given the dramatic implications of setting these overall targets, it is not surprising that many people turn to history as a guide—especially when faced with a problem of the magnitude and complexity of the current deficit dilemma. Indeed, it is common to see lawmakers, pundits, and commentators cite the last 60 years as a factor in their thinking about what to do between now and 2070.
The most common suggestion, especially from conservatives, is a target of 18 percent of GDP, which is the approximate average amount of revenue collected by the federal government since 1950. That certainly sounds like a compelling statistic. It implies that the amount of revenue the federal government raises has been constant and sufficient for the past 60 years. If 18 percent of GDP has been good enough for us since World War II, why change it now?
But the contours of the federal budget the last time 18 percent of revenue would have actually resulted in balance are almost unrecognizable compared to those we have now. This is as it should be. A lot can change in four and a half decades. What is odd, however, is how many people seem to think it’s a good idea to use the now-distant past as a constraint on our future budgeting decisions.
If 18 percent of GDP in tax revenue hasn’t been enough for the last 44 years, what makes us think it will be enough for the next? Just focusing for the moment on the next ten years, what would it really mean to try and balance the budget in the coming decade with just 18 percent of GDP in federal revenue? It would mean massive, enormous, draconian cuts.
Trying to squeeze the demographic, health care, and other challenges of the future into the constraints of the past will, invariably, result in poor outcomes. To see the folly of this kind of thinking, just imagine what post-war America would have looked like if we had forced ourselves to maintain pre-war levels of spending and revenue. From 1930 to 1940, outlays averaged just 8.1 percent of GDP. Revenue was just 5.2 percent of GDP. Could we have won the Cold War with those levels? Put a man on the moon? Cut poverty among our elderly by two-thirds? Grow the economy more than five times over?
We are going to have to make some hard choices going forward, and it is understandable, given how hard those choices are, to look for some kind of guide. But confining ourselves to an average from 1950 through today means limiting ourselves to the past. Fundamentally, we need to make budget decisions based on our current and future circumstances, not our past ones.
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