This graph shows the growth of GDP and Federal government expenditures per capita, and earnings for production and nonsupervisory workers, all yearly and in 2010 dollars.


The end of the cold war meant a very significant break in the growth of  federal government. Reagan and Bush I did not reduce government, and Bill Clinton certainly did not increase it (and none of them was responsible for the end of the cold war). In the Bush II administration government growth kicked up very sharply again, due both to domestic (e.g. Medicare Part D) and war spending. The rate of growth of government spending was higher during WW II and the Korean and Vietnam wars, but in none of these wars did the expansion last for a full 8 years as it did during the Bush II administration.

Even with the stimulus and unemployment payments, the expansion of federal expenditures in 2009 and 2010 barely brings expenditures back up to the long-term trend with respect to GDP - as it was for example during the Reagan administration. To say that expenditures at this level mean disaster is obviously nonsensical.  Why then do we have large deficits? The simple answer is that taxes have been reduced too much, especially for upper brackets.  Up until 1981, taxes were much more progressive with top rate at least 70% and obviously this did not prevent economic growth.

As exemplified by the earnings curve, the working people at the lower end of the income spectrum no longer have the means to make up the deficits, and there is no economic or moral reason to try to make them do so.  There is no need to speculate about the economic effects of making tax rates more progressive; this is how they were from 1934 till after 1965 (when the top rate was reduced from 91% to 70%).

The period from 1934 to about the middle 60's was also a time when the Fed kept interest rates low, even during the high inflation in the 40's and 50's.  We also do not have to speculate about the effects of a low-interest-rate policy, or rely on the chronically inaccurate models of economists; that period was one of the most prosperous in American history and involved steady growth of real wages and reduction in inequality.  This changed drastically when the Fed took on the task of attempting to control inflation starting in the late 60's - a task at which it failed.


skeptonomist   10/17/10