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How much does that matter? Some liberals say not to worry. They point out that the New Deal was funded by deficits, claim that interest costs on the debt will be minor and insist that fiscal scolds are putting accounting niceties ahead of economic needs. They exaggerate on all of these counts. When the New Deal deployed deficit spending from 1933 to '36, the deficits were around 5% of GDP, compared with around 10% today. The publicly held debt was rather stable, around 40% of GDP then, but it will soon reach 60% of GDP in 2010, and on the Administration's budget plans will rise above 70% by 2012. What's more, in the 1930s the debt was financed domestically--by Americans. Today about half of public debt is held by the rest of the world, much of it by China and Japan. In the New Deal era, taxes could easily rise to cover the increased cost of servicing interest on the debt. Today we have no agreement on how such debt servicing will be paid for. And we face another unprecedented challenge: large increases in entitlement spending as a share of GDP are likely to continue into the 2020s and '30s as the population ages and health care costs mount.
Let's look more closely at budget revenue and outlays. In a normal year, our federal tax system takes in around 17% of GDP--less in the current recession and more in years of financial bubbles, when capital-gains-tax collections are high. It's important to understand what that revenue buys us. Military spending accounts for around 5% of GDP. Health spending (including Medicare, Medicaid and veterans' health) is around 5% of GDP, as is Social Security (retirement, disability and veterans' benefits). Interest payments on the debt will soon reach 2% of GDP. In short, the Federal Government collects tax revenue sufficient to cover just four budget items. The rest of the budget is funded by borrowing.
Here are some of the things not covered by government revenue that we are currently borrowing to pay for: homeland security, unemployment compensation, job training, support for state and local governments, federal higher-education outlays, satellites and manned space missions, the National Science Foundation, the National Institutes of Health, the National Oceanic and Atmospheric Administration, community development, food stamps, low-cost housing, roads, bridges, environmental protection and conservation, emergency relief and reconstruction (like in New Orleans), the judicial and penal systems, international diplomacy and poverty reduction, renewable energy. These aren't temporary programs or things we can do without. They are core public services needed for an efficient and fair economy.
Indeed, many of these items are already deeply underfunded. Programs for the poor are often brutally squeezed. Shortfalls in education outlays are shortchanging young people, forcing many to leave college before they graduate because families are unable to cover college tuition. The conversion to clean energy is stymied by a lack of cash. Future NASA missions are being scrubbed. The list is long and perilous.