The Reagan Era of Smaller Government?
Duncan Black’s post entitled Sully is a reaction to an article by Dana Milbank on a conference where Bruce Bartlett and Andrew Sullivan were doing some Bush bushing (also see Kash’s post). Sully and Bruce long for the days when President Reagan allegedly brought us a smaller government. Duncan writes:
I know the myth of the Reagan era is one of those consensus things impervious to fact but lets go to the numbers. In 1981 when Reagan took office, as a percent of GDP federal outlays were 22.2% of GDP. When he left, in 1989, federal outlays were an incredibly shrunken 21.2%. Revenues went from 19.6% to 18.4%, which is why we were blessed with those lovely Reagan deficits. Under George Bush II, outlays went from 18.5 to 20.1% of GDP in 2005, and revenues from 19.8 to 17.5%. An increase in outlays, to be sure, but federal expenditures are still smaller, as a percentage of GDP, than they were at the end of the Reagan era of small government.
I changed the emphasis in Duncan’s post to reflect something rather odd about it. Had Federal spending declined by 1% of GDP under President Reagan, I might understand Bruce’s argument. The following graph was taken from the Bureau of Economic Analysis table 3.2 (line 1 is revenues drawn in blue and line 19 is expenditures drawn in purple – both as shares of GDP). Federal spending as a share of GDP was 21.5% in 1981 and was 21.3% in 1989. We did see this share decline to only 19.0% by 2000 – but that was mostly the result of the Peace Dividend. But Bruce and Sully are right in one sense – Federal spending has risen as a share of GDP under George W. Bush. However, the main reason for the Bush deficits is the decline in revenues and not the increase in expenditures.
As far as the ratio of Federal revenues to GDP, we should be mindful of two issues. Taxes tend to be so procyclical that the revenue to GDP ratio rises during booms and declines during recessions. But more importantly, the use of total Federal revenues and expenditures credits to the unified surplus (deficit) those Social Security surpluses that followed the 1983 Social Security reforms. In other words, the increase in payroll contributions partially offset the reductions in income taxes during the Reagan years.