Our Fiscal Past is a Foreign Country

The past is a foreign country: they do things differently there

--L. P. Hartley

A couple of weeks ago, a minor kerfuffle arose here in Minnesota over something as seemingly mundane as a “tax incidence” study.  Democrats wanted to study only the impact on taxpayers of state and local taxes.  Republicans wanted to include the impact of Federal taxes.

The dispute may have been minor, but the impact is major.  Taxpayers located in Minnesota pay taxes at all three levels.  Too often, each level of government considers only its own actions, never the cumulative effects.  In the end, the Democrats got their way and as far as the State of Minnesota is concerned, Federal taxes don’t officially exist.

As it stands, Minnesota ranks 6th in the nation for worst tax climate but more importantly, we rank even worse than our neighbors No. 8 Wisconsin and No. 9 Iowa.  Minnesota’s Democrats are considering proposals that would increase the state’s tax burden by an additional $2.1 billion. 

With one-party rule in Minnesota, what the Republicans think of all this is of no consequence.  However, at the national level, the GOP seems to be the source of all problems.

London Calling
I was driving down the road last week, listening to a BBC Radio announcer interview Thomas E. Mann of The Brookings Institution on the looming American budget sequester.

Along with along with Minnesota's Norman J. Ornstein, Dr. Mann wrote a book titled It’s Even Worse Than It Looks: How the American Constitutional System Collided with the New Politics of Extremism.

The Mann/Ornstein thesis can be summed up by this commentary they wrote for the Washington Post almost a year ago, “Let's just say it, the Republicans are the problem”

In case you missed the point from the headline, Mann and Ornstein write,

“The GOP has become an insurgent outlier in American politics.  It is ideologically extreme; scornful of compromise; unmoved by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition.

“When one party moves this far from the mainstream, it makes it nearly impossible for the political system to deal constructively with the country’s challenges.”

Whew!  What, you may ask, is the evidence for the Republicans having moved so far from the mainstream?  Republicans won’t vote to raise taxes.

It didn’t use to be this way.  Republicans used to be reliable tax raisers.

America’s Political Evolution:  Leviathan as a Pup

Statistics on government spending (at all levels) as a percentage of the nation's economic output tell an interesting story about America's political evolution.

Way back in 1900, American government spending at all levels represented less than 8 percent of the economy, as measured by Gross Domestic Product (GDP).  Spending by local governments led the way, with slightly more than 4 percent of GDP.  The Federal government spent a little over 3 percent of GDP, with state government spending at only about ½ of a percent of GDP.

Spending levels held fairly steady until the First World War.  To prosecute the war, Federal spending  soared to more than 24 percent of GDP in 1919.  Spending dropped back down during the 1920's peace, and stood at 3.68 percent of GDP in 1929, little changed from the level three decades earlier.  State and local spending had drifted upward in the interim and total government spending stood at 11.4 percent of GDP on the eve of the Depression.

As you would expect, the Great Depression and FDR's New Deal saw government's share of the economy explode.  Before the U.S. entry into World War II, the Federal government's share of GDP was now above 11 percent alone.  Total government spending in 1941 came in at slightly less than 20 percent of GDP.

World War II caused government spending to increase to unprecedented levels.  But by 1951, Federal spending has dropped back under 15 percent of GDP.  Total government spending that year came in at 23.1 percent of GDP.

By the time of JFK's New Frontier (1961) total spending as a share of GDP was up to more than 31 percent of GDP.  Another 10 years later (1971) we passed the ⅓ mark, due mainly to more state and local government spending.

As Reagan began his Presidency (1981), total spending by government was above 37 percent of GDP.  By Bill Clinton's first term, we were pushing 40 percent, but stayed below that level for the next 15 years.  It was not until the 2008 financial crisis and the election of Barack Obama that government spending exceeded 40 percent of the economy.  In 2009, it totaled 46.7 percent, with local government around 12 percent, state government at 10 percent, and the Federal government spending 25 percent of GDP.

In Europe, government spending as a share of the region's economy stands at 49.1 percent.

So the gap between America's unfettered, uncaring, cowboy-style capitalism and Europe's compassionate, over-regulated, cradle-to-grave socialism has dwindled down to a hardly noticeable 2.4 percent.

Europe proves on a daily basis that European levels of government spending are not sustainable.  Despite all the evidence, we seem determined to give it a go.

To Recap:
In the McKinley/Teddy Roosevelt/Taft era, Republicans were willing to go along with higher taxes, at a time when government represented less than one-tenth of the economy (1900 through 1917).

In the Coolidge/Hoover era, Republicans were willing to go along with higher taxes, at a time when government represented less than ¼ of the economy (1920-1941).

In the Eisenhower/Nixon era, Republicans were willing to go along with higher taxes, at a time when government represented less than ⅓ of the economy (1947-1970)

In the Ford/Reagan/Bush era, Republicans were willing to go along with higher taxes, at a time when government represented less than two-fifths of the economy (1971-2007).

Now that total government spending is reaching up to half of the U.S. economy, Republicans have balked at raising taxes.  And, thus, they are no longer welcome in polite society.

Back to the BBC interview with Dr. Mann.  I can’t find a transcript on the internet, but I do this gentleman no harm by summarizing his argument as follows:  Republicans are responsible for all the trouble in the world, as they will not agree to raise taxes.

The line Dr. Mann was peddling on the BBC last week was the same as last year's; not even bothering to account for the income tax and payroll tax increases (among 13 new Federal tax increases) resulting from the "fiscal cliff" deal at the end of last year.

That Republicans allow tax increases to occur is, apparently, not enough for Dr. Mann:  they need to do so willingly, if not gratefully.  Messrs. Mann and Ornstein are correct in their thesis only so far as Republicans--by playing along with every previous expansion of government--have no right now to complain that government spending has fundamentally transformed the nature of our society.

The Yardstick

The Wall Street Journal’s Peggy Noonan wrote a column a couple of years ago, right before Republican landslide of 2010 (remember that?) about the politics of the age, using the metaphor of a yardstick,

“Imagine that over at the 36-inch end you've got pure liberal thinking—more and larger government programs, a bigger government that costs more in the many ways that cost can be calculated.  Over at the other end you've got conservative thinking—a government that is growing smaller and less demanding and is less expensive.  You assume that when the two major parties are negotiating bills in Washington, they sort of lay down the yardstick and begin negotiations at the 18-inch line.  Each party pulls in the direction it wants, and the dominant party moves the government a few inches in their direction.

“But if you look at the past half century or so you have to think: How come even when Republicans are in charge, even when they're dominant, government has always gotten larger and more expensive?  It's always grown!  It's as if something inexorable in our political reality—with those who think in liberal terms dominating the establishment, the media, the academy—has always tilted the starting point in negotiations away from 18 inches, and always toward liberalism, toward the 36-inch point.

Democrats on the Hill or in the White House try to pull it up to 30, Republicans try to pull it back to 25.  A deal is struck at 28.  Washington Republicans call it victory: ‘Hey, it coulda been 29!’  But regular conservative-minded or Republican voters see yet another loss.  They could live with 18.  They'd like eight.  Instead it's 28.”

Having gotten the yardstick to the 31-inch-line during the year-end battle over the fiscal cliff, President Obama now seeks to move the mark to the 33-inch line.

Obama’s failure to do so is, of course, entirely the fault of the Republicans in the U.S. House of Representatives.

Have the Republicans left the mainstream?  Or has the mainstream left the Republicans?