Spending by federal, state and local governments on payrolls, equipment, buildings, teachers, emergency workers, defense programs and other core governmental functions has been shrinking steadily since the deep 2007-2009 recession and as the anemic recovery continues.
This recent shrinkage has largely been obscured by an increase in spending on benefit payments to individuals under "entitlement" programs, including Social Security, Medicare, Medicaid and veterans benefits. Retiring baby boomers are driving much of this increase.
Another round of huge cuts—known in Washington parlance as the "sequester"—will hit beginning March 1, potentially meaning layoffs for hundreds of thousands of federal workers unless Congress and President Barack Obama can strike a deficit-reduction deal to avert them.
With the deadline only a week off, Obama and Republicans who control the House are far apart over how to resolve the deadlock. While last-minute budget deals are frequent in Washington, neither side is optimistic of reaching one this time.
Even as the private sector has been slowly adding jobs, governments have been shedding them, holding down overall employment gains and keeping the jobless rate close to 8 percent, compared with normal nonrecessionary levels of 5 to 6 percent that have prevailed since the 1950s.
"It's a massive drag on the economy. We lost three-quarter million public-sector jobs in the recovery," said economist Heidi Shierholz of the labor-friendly Economic Policy Institute. "We're still losing government jobs, although the pace has slowed. But we haven't turned around yet."
A larger-than-usual decline in federal spending, notably on defense programs, helped push the economy into negative territory in the final three months of 2012. Economic growth, meanwhile, has been inching along at a weak 1-2 percent—not enough to significantly further drive down the national unemployment rate, which now stands at 7.9 percent.
Although federal spending is projected to decline from 22.8 percent of the gross domestic product recorded last year to 21.5 percent by 2017, it still will exceed the 40-year-average of 21.0 percent, according to the nonpartisan Congressional Budget Office. Spending peaked at 25.2 percent of GDP in 2009.
The budget office also said the economy is roughly 5.5 percent smaller than it would have been had there been no recession.
The Defense Department already has made deep spending cuts, and outgoing Defense Secretary Leon Panetta said 800,000 civilian Pentagon employees were notified this week they likely are to be placed on periods of unpaid leave due to lawmakers' failure to act.
The recent downsizing in government is most pronounced at the state and local levels. Most states have constitutional or statutory requirements for balanced budgets.
That means nearly all states are prohibited from running budget deficits, while the federal government is not.
Not only can the federal government run deficits, but it can print money—through actions by the Federal Reserve—something states are prohibited from doing.
Those calling for a smaller government mostly don't take notice of the wave of recent cutbacks. Their clarion call remains Ronald Reagan's mantra: Government doesn't solve problems, it is the problem.
"This spending issue is the biggest issue that threatens our future," House Speaker John Boehner, R-Ohio, says. "When are we going to get serious about our long-term spending problem?"
And Florida Sen. Marco Rubio of Florida, delivering the GOP response to Obama's State of the Union address, said "a major cause of our recent downturn was a housing crisis created by reckless government policies."
Soaring recent government deficits are partially a side effect of the worst recession since the 1930s, which took a huge bite out of tax revenues at the same time spending increased on recession-fighting programs like unemployment compensation and stimulus measures under both Presidents George W. Bush and Obama.
"The problem going forward is one of demographics and rising health care. It is the baby-boom generation retiring," said Alice Rivlin, a White House budget director under President Bill Clinton. "It's the fact that everybody is living longer."
Republicans argue that entitlement programs should be on the cutting board as well as other government programs. Democrats generally have been more protective of them, although the president and many congressional Democrats acknowledge some paring of these popular programs is in order.
The federal budget deficit for the fiscal year ending Sept. 30 is estimated to be $845 billion—the first time it's dropped below $1 trillion in five years. But it's on track to rise again as more and more baby boomers retire and qualify for federal benefits and as interest payments on the national debt keep going up.
The national debt first inched past $1 trillion early in the Reagan administration and has grown in leaps and bounds ever since through both Democratic and Republican presidencies. It now stands at $16.6 trillion and is on a path toward soon becoming unsustainable, both parties agree.
Unchecked, entitlement payments will add roughly $700 billion to the debt over the next four years.
For now, though, "the economy is continuing to heal from the worst economic downturn since the Great Depression," top White House economic adviser Alan Krueger says.
Under the sequester law, roughly $85 billion in federal spending would be slashed in the remaining seven months of this fiscal year and a total of $1.2 trillion in cuts over 10 years.
While entitlement programs and uniformed military personnel would be exempt, the rest of the government would be hit with indiscriminate across-the-board cuts.
Obama wants government deficits trimmed through a mix of selective spending cuts and new tax revenues, mostly by ending deductions and tax credits frequently claimed by the wealthiest Americans.
Republicans oppose any new taxes, even if for closing loopholes rather than increasing rates.
The president has been making campaign-like trips to highlight the damage the pending sequester cuts would be to various sectors of the economy. On Tuesday he'll go to a shipbuilding company in Newport News, Va., the White House announced.
"In just seven days, a series of automatic cuts could go into effect that would severely affect companies, like this one, that depend on the defense industry and its workers," White House spokesman Jan Carney said Friday.
The looming spending cuts were first scheduled to take effect on Jan. 1. But they were postponed to March 1 as part of year-end "fiscal cliff" negotiations that also raised tax rates on affluent Americans. Republicans insist that's enough tax increasing for now.
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