The Obama Democrats’ stealth strategy for increasing the size and scope of the federal government is well under way, despite huge voter backlash. Federal spending has risen from a 30-year average of 21 percent of gross domestic product to 25 percent, and a bipartisan commission tasked with reducing the deficit may recommend tax increases.
Presidential economic adviser Paul Volcker has already called for a value-added tax, a form of national sales tax. President Obama yesterday refused to rule out any tax hikes, saying of the deficit commission: “We’re not playing that game. I’m not going to say what’s in. I’m not going to say what’s out. I want this commission to be free to do its work.”
The assumption in some quarters is that a tax increase is inevitable and that the public won’t allow any significant decrease in public spending. But there’s reason to question that assumption.
Spending cuts have proved politically sustainable in other advanced countries. Economist Tyler Cowen, writing in The New York Times, notes that in the last two decades Canada, Sweden and Finland all cut government spending 20 percent within a few years when faced with structural budget deficits.
We may also be seeing some examples in American states. State and local government spending amounts to more than 10 percent of gross domestic product and grew faster than the economy over the last decade.
When revenues crashed, congressional Democrats sent a third of the money in their $862 billion February 2009 stimulus package to state and local governments. The stated reason was to prevent interruption of services. The political motive was to maintain existing state and local payrolls and to keep the dues money flowing to the public-employee unions that were so generous to Democrats in the 2008 election.
But that was one-time relief. As New York’s Democratic Lt. Gov. Richard Ravitch notes, “The stimulus package just raised higher the cliff from which we all will have to jump off.” Revenues still lag beneath the trajectory of spending.
Some states and localities have responded by raising taxes. But the two governors elected in November 2009 have not.
In Virginia, Republican Bob McDonnell has shepherded “painful cuts” in spending through a divided legislature. In New Jersey, Republican Chris Christie, facing an $11 billion deficit, has used his office’s unusually great powers to cut spending way back. In the process, Christie has taken on the teacher unions.
In 2005, California Gov. Arnold Schwarzenegger backed ballot propositions to reduce the power of public-employee unions. The unions spent something like $100 million — every dollar ultimately provided by taxpayers — to drive Schwarzenegger’s numbers down and beat the propositions.
That came at a time when surging prosperity seemed likely to continue. After losing on the ballot propositions, Schwarzenegger was unable or unwilling to stop the public-employee unions and obedient legislators and local officials from spending every dollar available and many more. After the financial crash in 2008, revenues crashed, and California state government faces something like insolvency.
In today’s dire economic climate, Christie seems to be marshalling more voter support than Schwarzenegger was able to in 2005. He points out that teachers are getting pay raises when most people are not and that they pay zero percent of health-insurance premiums. Last week, New Jersey voters defeated 316 of 541 local school budgets — 58.4 percent. Usually 70 percent are approved.
Barack Obama’s project of turning the United States into something more like Western Europe has stirred strong opposition and generated much less enthusiasm. What’s happening in states like Virginia and New Jersey — and what happened not so long ago in Canada, Sweden and Finland — suggests that voters may support spending cuts more than most US politicians have assumed. And much more than a value-added tax.