Why the Government Will Shrink, Even If Obama Wins Reelection

America can't even afford the government it has now.

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Government is the answer.

This theme surfaces frequently in President Obama's campaign speeches, as he tries to convince voters that helpful new policies from Washington will solve their problems. During a recent speech in Roanoke, Virginia, Obama generated unflattering headlines by saying, "If you've got a business—you didn't build that," then ticking off a list of marvels like the Golden Gate Bridge, the Hoover Dam and the Internet that exist only because of government largesse.

[See big companies paying big fines.]

Obama is basically handing his Republican opponent, Mitt Romney, a tactical win by defining himself as a big-government Democrat. Why Obama would do this is mystifying. The popularity of the federal government has been falling sharply, not rising, and Americans by a large margin say Washington is a bigger threat to the nation's future than big business or big labor. Promising voters more of something they dislike doesn't seem like a winning strategy.

Yet fears of a swelling federal government are unfounded, no matter who wins in November. The next decade will almost certainly be one in which government shrinks—at all levels—because there simply won't be enough money to fund a government that's even as big as what we have now.

Bureaucratic downsizing is already happening at the state and local levels, where governments can't borrow quite as lavishly as Washington and cutbacks have been necessary to deal with shrinking budgets. Employment levels have fallen by about three percent since 2009 among both state and local government, while many city and state services are being cut. A new report on the future of state finances, led by former Federal Reserve Chairman Paul Volcker, suggests these trends could continue for years and perhaps intensify.

[See how Washington is wrecking the economy—Part II.]

That's a preview of what will happen at the federal government, which has been spared sharp cuts up till now. The new austerity could begin as early as January 1, 2013, when about $120 billion in annual spending cuts is due to go into effect, unless Congress changes its mind and votes to rescind the same cuts it approved last year. Half of those cuts are due to come from the defense budget, with the rest coming from hundreds of other programs.

Those cuts are considered deep enough to lower economic growth and perhaps cause a recession if they go into effect—yet that's just a taste of what will need to happen in order to get Washington's finances under control. Obama, Romney and most other politicians assiduously avoid telling the truth about the pain that's coming for most Americans, but the problem is so big that dealing with it will basically require an entire reboot of our relationship with government, including a dramatic decline in the size of the federal bureaucracy and cuts in the benefits that flow to millions.

A few numbers reveal the gargantuan scale of the problem. As Wall Street Journal writer David Wessel points out, eliminating every single federal job—including the armed services—would cut just $435 billion out of a $3.8 trillion federal budget. The national debt, at nearly $16 trillion, is 37 times the size of the entire annual federal payroll.

[See why we are all outsourcers.]

About two-thirds of all federal spending goes straight to programs that benefit seniors, the poor, the disabled and others in need of help. And that proportion is rising to levels that will be unsustainable before long. "It is mathematically impossible to preserve our current path for Medicare, Medicaid, and Social Security without a blistering tax increase on the working age middle class at some point in the near future," according to a recent analysis by Third Way, a centrist think tank.

Taxes will have to go up for most Americans at some point, but it's hard to imagine that middle-class voters would tolerate a blistering tax increase without any other measures to shave government spending. Any president who attempted this would do untold damage to his party. Once the choices are clear, the most likely outcome will be the smallest possible tax increases combined with the most tolerable cuts in government, including changes to entitlement programs. Government has to shrink because voters won't pay for it to get any bigger, and they probably won't even pay for it to remain at its current size.

Obama's health reforms do represent one area in which government must expand in order to carry out new duties, but this won't trigger an overall swelling of government beyond what is on the books now. In fact, if the new health bureaucracy should go over budget, it might require cutbacks elsewhere.

It's possible that an advocate of smaller government, such as Mitt Romney, might cut the federal bureaucracy quicker and deeper than a pro-government politician like Obama. But federal programs are notoriously hard to kill, no matter who's in charge, since Congress often protects funding for favored programs, and just about every program is favored by someone. Real cuts are only likely when both parties agree to them, which diminishes the importance of the president to the whole issue.

Still, the federal government has probably reached its peak size, with many years of declines on the way. Obama might win a few extra votes if he pointed this out, because no big-government candidate is likely to get his way over the next four years. The government's glory days are over.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.