Is the Federal Government Really Too Big?

The New York Times published a letter to the editor by a fiscal conservative who claimed not to be a political activist but was drawn to the Tea Party movement:

We are...displeased with our government of late and are concerned about our nation’s future. Our Depression-era parents taught us to live within our means. And to keep our house in order. This is a lesson lost in Washington.

A question I have been thinking about for some time now is whether such people are correct. Is Washington spending too much and taking in too little?

The obvious answer is, "Of course." The estimated federal budget for the coming year involves receipts of $2.3 trillion and outlays of $3.6 trillion. The federal government would need to take in over 50% more in taxes than it currently is collecting to balance the budget. This is not an ideal state of affairs, but it's the one we have, because this country has neither the political will nor, likely, the economic capacity to hand over one-quarter of our GDP to the federal government.

Ignoring that elephant in the room for the moment, is a $3.6 trillion federal government too big? Let's look at where that money is going.


Imagine that $3.6 trillion budget cut up into five roughly equal pieces. This is what they would look like, with approximate numbers:

• Social Security ($700 billion)
• Medicare and Medicaid ($750 billion)
• Other mandatory or entitlement spending, including all federally funded welfare programs and interest on the national debt* ($700 billion)
• Defense spending ($700 billion)
• Everything else ($750 billion)

Note that the final two categories are barely enough to cover our $1.3 trillion budget deficit. Yes, you read that correctly. You could get rid of the entire federal government, except for entitlement and mandatory spending, and still be left with just $150 billion left over. What's weighing us down is not out-of-control government spending—it's the $2 trillion in social security, medical coverage, and welfare we are doling out every year.

So, the question we really need to be asking is, Should we reconsider our federal entitlement scheme? Certainly, programs like Medicare are inefficient, but improving efficiency will not make a huge amount of difference in the grand scheme of things, unless we drastically lower the cost of health care—a project which is more in the control of insurance companies and hospitals than the government.

So, $1.2 trillion of this money, in some form or another, is going to people over the age of 65, providing them a safety net that did not exist in previous generations. About $300 billion goes to Medicaid, providing the poorest people with health insurance they could otherwise not afford. I'm not willing to cut this; I will bear this cost whether or not poor people have health care, and this way of spending it is the more ethical option. Another $100 billion goes to retirement and disability payment programs for federal employees, which is effectively just a special social security fund.

The remaining $400 billion or so goes to various welfare programs—everything from housing assistance to income assistance to food stamps. The libertarians among us would say that these functions should be picked up by private charities, if at all, but I'm not convinced by this argument.

So, where do we start cutting?


* The $136 billion in debt service, or 4% of the federal budget, is an anomaly resulting from current interest rates; interest has not been such a small percentage of either our GDP or the federal budget since the 1940s. Net interest as a percent of total federal government outlays peaked in the mid-1990s at around 15%—a  result of the Reagan-induced debt spiral combined with the high interest rates of the roaring '90s.