One Side Must Lose (I)

49% of Americans believe the federal government has become so large and powerful that it poses an immediate threat to the rights and freedoms of ordinary citizens. In 2003, less than a third (30%) believed this.

--Gallup

Look at the chart. It’s at the foundation of our current political struggle. Two sides are fighting about the growth and size of government spending—unsustainable unless taxes go up on everyone—and what to do about it.

Yes, government held a larger share of our national wealth in World War II (1942-46), and yes, it surged to another peak during the Korean War (1951-54). But aside from those two wars, after government grew sharply under Herbert Hoover and Franklin Roosevelt (1930 to 1935), it then more slowly and steadily expanded from 1940 (10% of GDP) to 1983 (23.5%). These were the years of the “Blue Model,” the big government-business-labor consensus dominated by Democrats that had frayed by the 1970s.

Reagan’s 1980s “revolution” capped government growth and actually sent it into reverse, as the economy boomed under Reagan/Bush 41 (1984-93) and under Clinton, who mostly governed with a Republican Congress (1995-2001). Economic growth yielded a larger economy, which reduced government’s share of GDP. In a tougher economy, Bush 43 held government’s size steady at 20% of GDP until 2008. Now comes Obama, and the dramatic surge of government to 25% of GDP, even as revenue fell below its historical 18% of GDP average. That 7-8% gap is unsustainable. The gap must close.

Republicans want to return government spending to 20% of GDP or lower, close to the historic revenue collection level. Obama and the Democrats can’t say before the 2012 election what they know: taxes have to rise on everyone if we are to maintain a government that’s 25% of our GDP. The national elite realize Americans must pay dramatically higher taxes to cover the rising medical expenses of our aging population, as well as to sustain the balance of a progressive agenda held in check between Reagan’s 1980 election and Obama’s 2008 victory.

Obama’s “no retreat” insistence on raising taxes on those making over $250,000 a year is his indispensable first step to raising taxes on everyone, most likely with a European-style Value Added Tax (national sales tax), the tax that props up national health insurance in Europe. Only if Obama insists before the election on raising taxes on wealthy people can he then use his re-election to justify later tax increases on everyone (equity, after all).

Democrats must attempt an election-season tax increase. Republicans who want to trim government back to its historical 20% of GDP must say “No!” to any tax increase, including one on the “idle rich.” No room for compromise. It’s war.