Mises Daily Articles
The Non-Issue that Should Be an Issue
[An MP3 audio file of this article, read by Ron Jennings, is available for download.]
It's the spending, stupid!
When was the last time you heard Senator Obama or Senator McCain give a speech on the bloated public sector? Did Senator Clinton, in her recently concluded presidential bid, ever scold voters who constantly want the government to "give" them more and more services?
These are rhetorical questions. Today our ruling parties tacitly agree that no government department can be eliminated, that major spending reductions are forbidden and that the spending spree must continue.
Indeed, Democrats say little or nothing in the federal budget can be cut. The government must expand its responsibilities. It must provide health care and financial security for all. Also, there must be more spending for national security. Still, there is little serious discussion about what all this would cost, though sometimes, even in the heat of partisan battles, some truth emerges.
"Our country is in a sinkhole of debt, and it is almost as if we have adopted a philosophy of 'all you can spend' around here. Spending is out of control," says Senator Mike Enzi (R-Wyo) in criticizing the Democrats' recently proposed federal budget. Nevertheless, despite making an effective case that red ink is endless, Enzi should look at his own party.
Republicans, who controlled Congress for 12 years until the end of 2006, haven't been much better than Democrats. Republicans used to talk about reducing the welfare state. I remember when candidate Ronald Reagan in 1980 promised to end the Energy and Education departments. Some Republicans, who themselves have caught the entitlement-spending/social-engineering bug, now propose the creation of a federal department of families.
Indeed many Republicans, who once said they were against the welfare state, now brag they are better at running the welfare state than the Democrats. I remember a speech on this theme given by George Will to the Security Traders Association some two years ago. ("Wonderful speech," I told Will as he walked out and started to gloat at what he thought was another compliment. "Yes, sir. Now I know why I'm a libertarian!" Deflated, the Republican welfare statist growled and hurried away.)
So why don't Republicans care about the outrageous bills they've helped accumulate? Economic growth, they argue, will generate extra revenue to pay for everything. Therefore, no hard choices on spending are needed. This is the implicit position of all mainstream pols. Democrats think we can solve all our problems by taxing the rich. Wall Street Journal Republicans, on the other hand, think it's just a matter of finding the right tax cuts.
So it follows that Obama, Clinton, and McCain — with the help of the most of the mainstream media during the primary season — all effectively evaded the most important fiscal issue, an issue that threatens our economic and political liberty. Entitlement spending is increasing at an incredible rate of six percent a year. That's about double the rate of inflation, although given the central bank's easy monetary policies that could change fast.
These rising debts, according to the Congressional Budget Office, "can sap national saving, slow capital formation, lower economic growth, and in the extreme, produce a substantial economic contraction." That's a perfect description of our current economic woes. "We cannot sustain this level of spending," Senator Enzi says, "without inflicting grave damage on the fiscal health and future of our country."
So how and where will all this spending be paid for today and tomorrow?
Instead of discussing that, the two major presidential candidates will likely continue a faux debate. They'll argue ridiculous issues such as whether or not capital gains taxes should be raised, as though taking billions more from the rich will wipe out trillions of dollars of debt that will burden unborn generations.
And the debate will inevitably become sillier when the candidates ignore another unanswered question: who are the rich in a nation of constantly rising prices and taxes? The candidates, just as they have on Iraq, either avoid the hard issue or discuss it in generalities, allowing themselves plenty of wiggle room.
So, instead of debating the substance of overspending, our politicians quibble over how much warfare and welfare programs should be expanded, never even considering a program cut or elimination. And, in waging a campaign of promises, most or all of which will surely be broken, they have ignored another important issue: how will overburdened taxpayers pay for their expensive promises and those of their predecessors?
"I would argue," says US Comptroller General David Walker, "that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility."
Truly, how will taxpayers, and their children and grandchildren, pay for the debts already accumulated and those that surely will be accumulated if Obama or McCain go ahead with just a few of their campaign promises?
"We're spending more money than we're making," Walker warns, "We're charging it to a credit card and expecting our grandchildren to pay for it. And that's absolutely outrageous."
No major candidate left on the campaign trail, reviewing vast plans to expand various welfare and military programs, has been called to account on this credit-card spending policy. Who asks them what substantial spending cuts they will make? Who is calling them to account on the huge spending obligations the government already has, as well as the consequences of those obligations?
Who is reminding them that government spending has led to persistent red ink and the potential for a return to the economic woes of the late 1970s and early '80s? That's when Richard Nixon, a Republican president who identified himself as "a Keynesian," an early compassionate-conservative label, ran huge deficits as he continued to expand the welfare and warfare state. His lack of spending discipline also had terrible consequences. Inflation ended up in double digits and interest rates hit 20 percent. We're now headed in the same direction. No major political figure objects to what Walker today calls "a fiscal cancer."
The American worker of today is already facing increasing inflation rates. He or she is threatened with still more payroll tax hikes, a shaky stock market, and a lower standard of living. If major politicians continue their usual approach — promising more government services today while saying little or nothing about the fiscal consequences of these promises — then the worker of tomorrow will surely have less economic liberty.
That is because each worker will keep less and less of the product of his labor. And after-tax income will actually be much lower as the invisible tax, inflation, eats away more and more of the worker's buying power. That is, unless the next president and Congress stop the spending madness.
Our "official" national debt is now at some $9 trillion (Senator Enzi says that will increase by $2 trillion in the next five years if nothing is changed). I put the word official in quotation marks because the government doesn't use the generally accepted accounting practices (GAAP) that it expects the rest of us to follow. (This, of course, raises a tangential question for another article: Who penalizes the government when it breaks the law or damages the currency? The government? A person cannot be a judge in his or her own case.)
But the official $9 trillion federal debt is misleading. It doesn't count things such as entitlement programs, which are swept under the fiscal rug, with people often forgetting how these programs started, accelerated, and will likely become unmanageable burdens for our nation if they haven't already.
Will people, 20 years from now, understand the consequences of the prescription-drug plan railroaded through Congress by George Bush? I believe "railroaded" is not an exaggeration because congressional observer Norman Ornstein of the American Enterprise Institute wrote of that vote, "The Medicare prescription drug vote — three hours instead of 15 minutes, hours after a clear majority of the House had signaled its will [in opposition] — was the ugliest and most outrageous breach of standards in the modern history of the House."
I doubt most taxpayers will remember that 20 or 30 years from now, but they will certainly feel its high costs, just as a generation of middle-class Americans today pays sky-high FICA taxes. For millions of American households, the FICA taxes are higher than the income taxes.
And even now, after dozens of payroll tax increases, a defender of this program like Roger Lowenstein, in his book While America Aged, argues the system should be "strengthened." That, of course, means another "reform of the system." Historically, a reform always gives us higher taxes.
Many Americans unfortunately will likely forget the mismanagement that will bring these higher taxes, just as they forgot the higher taxes of yesterday. They'll end up blaming the rich or Arab leaders or some convenient bogeyman. But they'll never blame themselves and the big spenders they elected time and again.
Few Americans, for example, remember or blame President Richard Nixon and a Democratic Congress in 1972 for greatly expanding the Social Security program just in time for the elections. The Democratic Congress and the Republican president got into a bidding war over who could promise the most to Social Security recipients. Afterwards, they argued over who deserved the credit for the Social Security benefit hike.
The shortsighted voters in 1972 rewarded both and later they got the bill. The expansion led to numerous payroll tax increases to pay for Social Security. But there have been many other spending programs over the last three decades. These include Reagan's plan for a thousand-ship navy, a navy that was expanding just as the Soviet Union was about to implode.
And how big are these entitlement bills of the 1970s, '80s, and '90s today, and how big will they be over the lifetimes of our children and grandchildren? They're much bigger than the official $9 trillion national debt.
Over the next 75 years, the nation "faces $47 trillion in unfunded liabilities on our entitlement programs," according to US Senator Chuck Hagel in his recent book, America, Our Next Chapter. Unless someone stops the spending madness, it is reasonable to assume that the money will be found through explicit and implicit taxes. The latter is mainly inflation, the tax given to us by the central bank's reckless money-creation policies.
Hagel voted for the Iraqi War, another huge spending program that went amuck, with one presidential advisor, Lawrence Lindsay, fired when he suggested it could cost hundreds of billions of dollars. That was a comment ridiculed by angry Bush administration officials. Now Hagel blasts fellow Republican George Bush for the war. Maybe he can speak candidly because he is not running for president. Who does he blame for the public-spending orgies of the last generation?
"I would suggest that we have a lack of presidential and congressional fiscal discipline and leadership," Hagel writes. On this point, he gets it right. Both mainstream political parties made this mess along with the many voters who elect and re-elect them, but seem unconcerned about the long-term price tags.
For example, both parties voted for the pricey prescription drug plan without considering its true long-term costs. The Congressional Budget Office said it would cost $400 billion over ten years. The chief actuary for Medicare knew it would cost more than that, but he was pressured with the loss of his job if he released the real number, writes Michael Tanner in Leviathan on the Right. The actuary kept his job.
"The prescription drug bill was probably the most fiscally irresponsible piece of legislation since the 1960s," according to Walker. Indeed, the spending woes will go beyond the next decade. If one looks at the liabilities of Social Security/Medicare systems over an infinite horizon, the shortfall will come to some $11 trillion, as estimated by the trustees of the system.
The Left should also be blamed for its myopia. Its constant demand for expanding the welfare state cannot go on without impoverishing or possibly bankrupting the nation. But the Republicans — who once purported to represent an "isolationist" small-government alternative — are also part of the problem.
Many on the Right, the Wall Street Journal/supply-siders, are also sadly mistaken. They have distorted the principles of a once-good idea that was used by Treasury Secretary Andrew Mellon in the Harding administration of the early 1920s to recover from a post–World War I depression. That, as detailed in Murray Rothbard's America's Great Depression, was the last time laissez-faire ideas were used to help the nation recover from a depression.
The budget was balanced. Malinvestments weren't rescued by the government. They were allowed to die. And, yes, taxes were cut. The economy boomed in the rest of the decade. Significantly enough, when the Federal Reserve caused a crash in 1929, Mellon's advice to cut spending and taxes was ignored. Hoover fired Mellon and replaced him with someone who believed in counter-cyclical, big-government spending to promote a recovery. (The policy failed under Hoover, and it failed when it was expanded under FDR.)
Most Republican supply-siders of today have forgotten or distorted the spending-cut part of Mellon's policies. This is typified by Dick Cheney's line: "Reagan proved deficits don't matter."
But they do matter, according to one of the great economic historians, Joseph Schumpeter. Indeed, history has endless episodes of nations that experienced incredible economic and social problems owing to the government, which took over bigger and bigger pieces of the economy.
If the will of the people demands higher and higher public expenditures, if more and more means are used for purposes for which private individuals have not produced them, if more and more power stands behind this will, and if finally all parts of the people are gripped by entirely new ideas about private property and the forms of life — then the tax state will have run its course and society will have to depend on other motive forces for its economy than self-interest. This limit … can certainly be reached. Without doubt, the tax state can collapse.