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How big is government in the U.S.? By some yardsticks, a lot bigger than it was a year ago. Paradoxically, however, one traditional (if informal) measure shows a shrinking burden of government in the past two years.
Every April the Tax Foundation announces the arrival of Tax Freedom Day. As the chart below shows, this year it was estimated to have arrived just before our rendezvous with the IRS, on April 13. 
Click to enlarge.
Notionally, this is the day of the year when Americans are “free” of the burden of taxation, assuming that every penny of income earned before that date was used to pay taxes (federal, state, and local combined). Tax Freedom Day actually arrived two weeks earlier than it did a mere two years ago, in 2007, when it fell on April 29. In short, the relative tax burden has gone down, largely because tax collections go down during recessions. Does that mean that “the burden of government” has decreased accordingly over the last year or two? Probably not. As Milton Friedman liked to point out, when it comes to the size of government, it’s not how much governments collect in tax revenue that matters most, it’s how much they spend. 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 of paying for it to future generations. A few years ago, AIER began to estimate what we called “Friedman Day,” the day when Americans earn enough money to pay for government spending. Friedman Day falls later than Tax Freedom Day, because it includes more than the taxes you pay. It also includes the money the government borrows to pay for all the additional spending that isn’t covered by tax revenue. During the Bush Administration, Tax Freedom Day came earlier some years and later in others—but Friedman Day increased by about three weeks. The bottom line for the period 2001-2008: rising federal deficits, which taken together roughly doubled the national debt, to about $10.7 trillion by December 31, 2008. That trend has accelerated dramatically since last summer, apace with the subprime financial crisis, the recession, and, more recently, the initiatives taken by the Obama Administration. Now, as the chart shows, the gap between Tax Freedom Day and Friedman Day has stretched to nearly two months—from April 13 to June 7. The reason? The projected federal deficit for the fiscal year ending September 30 has mushroomed to $1.84 trillion. This means that about 46 cents of every dollar of federal spending will be financed by borrowing (through the sale of new U.S. Treasury securities). It also means that the federal deficit will likely reach about 13 percent of total U.S. output, or GDP. By the same token, the national debt has risen as a share of GDP to levels not seen since 1950. Among the new challenges will be how to get investors to lend the government the money (by buying Treasury securities) to finance the deficits. In the Bush years, it was mainly foreigners—not Americans—who financed the persistent federal deficits. Over two-thirds of the new debt was bought by foreigners, meaning specifically foreign governments and central banks. But now China, whose foreign-exchange reserves of about $2 trillion are 82 percent in dollar-denominated assets, has taken decisive moves to reduce its exposure to a decline in the value of the dollar. Beyond that, Chinese officials now say that the U.S. dollar is no longer strong enough to serve as the world’s reserve (or worldwide trading) currency. Why? Given the vast foreign holdings of dollar reserves, the current budget deficits could easily trigger a run on the dollar. Stay tuned for what promises to be an interesting time, as in the ancient Chinese curse, “May you live in interesting times.” This commentary is based on a longer article in the latest issue of Research Reports, available free to AIER subscribers or $2 for non-members. Also in this issue: - Business-Cycle Conditions: Too Early to Call
- Ask the Expert: Problems with Boilerplate
- When Private Coinage Made the Difference (a review of George Selgin's book Good Money: Private Enterprise and Popular Coinage)
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