It's Always the Spending, Whether Borrowed or Taxed

Politics' perpetual question is whether America is over-spent or under-taxed. Ideologically contemplating this conundrum, it appears an almost unanswerable Zen-like question. However, its answer is not an unknowable philosophical problem, but a straightforward fiscal one. At its roots: spending has, is, and will continue to elude revenues - even as revenues climb.

To see Washington's dramatic fiscal changes, we must look across decades, not just years, and measure against the economy of the day - as percentages of GDP. Even so, it is easy to be misled. Take the recent recession. Such periods cause revenue drops (as earnings fall) and spending increases (as social programs - and inevitable political "stimulative" attempts - are tapped).

In 2007 before the recession, federal revenues were 17.9% of GDP (slightly above the 1974 - 2013 average) and total federal outlays were 19% of GDP (below the 40-year average of 20.5%). By 2009 during the recession, revenues fell to 14.6% of GDP and spending rose to 24.4% of GDP. Moving sharply in opposite directions, they created the illusion that revenues and spending have moved roughly equally over longer periods. Not so.

To understand where we are and where we are going, look backward. In 1960, following the 1930s' New Deal and WWII - but still before the Great Society's advent - we see a very different fiscal picture.

Then the federal budget was balanced with total spending at 17.2% of GDP and revenues at 17.3%. Within that federal spending, defense accounted for 9% of GDP - a figure that would rapidly drop and help obscure a crucial fiscal shift.

By 1970, just after the mid-1960s' Great Society social programs - but before their full effect - revenues had increased to 18.4% and total outlays to 18.6%. Yet within those outlays, defense spending was just 7.8% of GDP, while non-defense spending had increased from 8.2% to 10.8% of GDP.

In 1980, revenues had increased slightly to 18.5% of GDP, but federal outlays had jumped to 21.1% of GDP - with non-defense spending spiking from 10.8% to 16.3% of GDP.

Both 1990 and 2000 seem to be pattern-breakers. In 1990, revenues were slightly down to 17.4% of GDP, while federal outlays were 21.2% of GDP and non-defense spending was 16.1% of GDP - both close to 1980. In 2000, revenues rose to 19.9% of GDP and spending dropped to 17.6% of GDP - with non-defense falling as well, to 14.7%.

With 2010 still in the crisis' wake, revenues were 14.6% of GDP, while total outlays were 23.4% of GDP and non-defense spending 18.7% of GDP.

Currently, the Congressional Budget Office projects this year's revenues at 17.6% of GDP (just above their 17.4%, 40-year average) and total outlays at 20.4% (slightly below their 20.5%, 40-year average) and non-defense spending at 16.9% of GDP (well below its post-recession level of four years ago).

Increment to increment, change appears muted. But looking back to 1960, we see clearly: revenues are close to where they were - 17.6% of GDP today, versus 17.3% then - but total spending has increased significantly, rising from 1960's 17.2% of GDP to 20.4% today. And within those increased outlays lies the stunning increase of non-defense spending - more than doubling from 8.2% of GDP to 16.9%.

Looking ahead, CBO projections predict the same story over the near- and longer-term. Over the next decade, revenues will increase to 18.3% of GDP in 2024, while total spending will increase to 22.1%, and non-defense spending to 19.3% of GDP.

In CBO's long-term projections (from September 2013), revenues increase again, to 19.5%, while total spending surges to 26%, and non-defense spending to 23.2%, of GDP. That puts revenues at their second highest peacetime point (surpassed only by 2000's 19.9%) and total outlays at their highest peacetime point - with government allocating over a quarter of the nation's economy. Astoundingly, non-defense spending alone will equal almost a quarter of America's GDP.

More concerning still, these levels will no longer be simply isolated peaks - attributable to crisis - as in the past. They will be the new norm.

The numbers tell the policy story written over three generations. A steady addition of social spending programs - known as entitlements or mandatory spending, because a qualifying beneficiary is legally entitled to a program, the spending of which is automatically mandated by law - has reshaped the government both fiscally and functionally.

In 1960, defense was primarily what the government did. Over three generations, that role shrunk, while the government itself dramatically grew. Measured by its budget, today's government is primarily and increasingly a social services provider.

Even with revenues at almost a fifth of GDP, far above the 40-year average, they will not only be unable to keep pace, but will fall increasingly behind. The federal government will be running at or above its former all-time peacetime highs in revenues and spending - not as exceptions but as a matter of course.

In a nation fixated on sustainability in all other aspects of endeavor, the government's fiscal reality is a glaring anomaly. There is no question what has, is, or will cause it. While some may dispute whether we will be living on borrowed time to test if this fiscal course is sustainable, none can dispute that we will increasingly be living on borrowed money to do so.