Until then, we're all government workers

By R.D. Norton

The late Nobel Prize-winning economist Milton Friedman liked to point out that when it comes to the size of government, it's not how much revenue it collects that matters most, but how much it spends.

If you cut taxes by half but don't reduce spending, you haven't done anything to shrink the size of government. All you've done is shift the burden to future generations.

Every April, the Tax Foundation announces the arrival of Tax Freedom Day. The idea is that this is the day of the year when Americans are "free" of the burden of taxation, assuming every penny earned before that date is used to pay federal, state, and local taxes.

This year, Tax Freedom Day arrived on April 9, three weeks earlier than it did before the recession. The relative tax burden went down partly because of the stimulus-package tax cuts and partly because tax collections decline during recessions.

But does this mean the burden of government decreased over the last year or two? Probably not.

A few years ago, the American Institute for Economic Research introduced an alternative measure: the day when Americans have earned enough money to pay for all government spending. We call this Friedman Day.

Friedman Day falls later than Tax Freedom Day because it takes into account more than taxes. It also considers the money government borrows to pay for spending that exceeds tax revenue.

During the Bush administration, Tax Freedom Day came earlier in some years and later in others. But Friedman Day tended to come later every year because of continuing federal deficits, which roughly doubled the size of the national debt between 2001 and 2008.

Now federal deficits have widened due to the financial crisis, the recession, and various Obama administration initiatives. Last year, the $1.4 trillion federal deficit amounted to about 9.9 percent of gross domestic product. For the current fiscal year, which ends Sept. 30, the deficit is expected to reach $1.5 trillion, or 10.3 percent of GDP, according to the Congressional Budget Office.

That means that more than 40 cents of every dollar the federal government spends is being paid for by borrowing, not by tax revenue.

It also means that Friedman Day this year will be Saturday, or about two weeks later than it was in 2008, before the recession.

Unfortunately, the end of the recession will not mean the end of huge federal deficits. The CBO predicts federal deficits of more than 5 percent of GDP for all but one of the next 10 years.

Some economists have argued that the U.S. economy could function adequately as long as federal deficits are kept under 3 percent of GDP. But almost no one says the same of deficits exceeding 5 percent of GDP. That's because when interest rates rise again, interest payments on the national debt will soar, making the deficits harder than ever to fix.

While deficits and the national debt have moved to the center of the political stage, Congress still appears unwilling to make the hard decisions needed to address them. That's partly because 2010 is an election year. But overwhelming deficits will have to be confronted sooner rather than later, regardless of the outcome in November.

Otherwise, a time will come within the decade when most federal spending is going to entitlements and interest - at the expense of everything else.