Tuesday, January 01, 2013

Happy New Year! Attention Washington: fix our spending problem



By James Shott 

As last week came to a close the nation was peering over the edge of “Fiscal Cliff” with only a few days left to fix the problem, and it seemed likely that nothing more would be done before 2013 arrived.

Nearly everyone likes to celebrate holidays, but when there is a crisis afoot, the people whose duty it is to address that problem are expected to make the appropriate sacrifices and do their job. Finding that your house is on fire, you expect the fire department to respond to your call. You don’t expect to be told, “sorry, but all firefighters are taking the holiday off.”

Where the fiscal cliff is concerned, the public servants we pay to responsibly run our government have put that priority behind others they consider more important. They went home for the holiday, or to Hawaii.

President Obama tells us over and over how the policies of conservatives and Republicans are responsible for "getting us in this mess." But that is wrong: what got us in this mess is decades of irresponsible and improper spending and taxation. It has not always been like it is today, and we are the victims of wrong-headed policies from those public servants.

Senator Kent Conrad (D-N.D), retiring Chairman of the Senate Budget Committee, told the National Press Club recently that raising both spending and taxes really should not be a problem, when viewed as a percent of gross domestic product (GDP). He noted that since 1969 the budget has been balanced five times and tax revenue was around 20 percent of GDP each of those times, and that the budget has never been balanced at the historical level of 18 or 18.5 percent of GDP, the level many Republicans favor.

Spending for Fiscal Year 2012 exceeds 22.9 percent of GDP, according to the 2012 edition of “Federal Spending by the Numbers.” In the past 20 years, federal outlays have grown 71 percent faster than inflation, and the average American household’s share of this spending is $29,691, or roughly two-thirds of median household income. Federal spending is projected to continue increasing at this rate, pushing total government outlays to $5.5 trillion a decade from now, and to about 36 percent of GDP in the next 25 years. To quote Mr. Obama: “That’s irresponsible. That’s unpatriotic."
  
Sen. Conrad is a fiscal hawk that sensibly advocates balance between revenue and spending, a philosophy that would eliminate the annual budget deficits the Obama administration loves. But like so many of those in Congress and in the administration, he accepts the current levels of both spending and taxation as appropriate. They are not only inappropriate, but are eight times higher than the average level over the first 130 years of our history.

Dean Kalahar, economics teacher and author of Practical Economics, explains that from 1787 to 1849, federal spending averaged 1.7 percent of GDP. For the next 51 years, from 1850 to 1900 (including fighting the Civil War) spending averaged only 3.1 percent. And from 1901 till 1930 (including fighting WWI) it never reached 8 percent, and averaged approximately 3.2 percent.

During the height of the progressive movement, including FDR's New Deal, federal spending never exceeded the 1934 level of 10.7 percent. And even though as WWII raged and spending shot to 43.6 percent of GDP, four years later it had fallen to 11.6 percent. For 130 years of our existence, federal spending averaged around 2.5 percent of GDP, says Mr. Kalahar.

That level of spending was close to what the Founders had in mind for their limited government. But it has grown incrementally, as politicians abandoned constitutional limits and today this statist, socialistic philosophy has moved us toward fiscal collapse.

Mr. Kalahar understands what public servants and many, perhaps most, Americans do not: Government spending is taken directly out of the pockets of the people, or out of the economy.  “Every dollar consumed by our profligate government is one less that could fund productive advancement in the private economy,” he wrote. “Every dime needlessly spent by government comes at the cost of efficiency in moving scarce resources to their most valuable use.”

What that means in simple terms is that if left alone, the private economy will most often cruise along comfortably, repair itself when necessary, and the genius of Americans will produce an expanding economy that benefits us all.

“The just and proper fiscal balance is to give the state what it needs to protect you and your property while at the same time protecting you and your property from the state,” he wrote. “Looking at the low historical trends that allowed this great nation to lead the world into prosperity would be a good place to start an honest debate in determining federal spending. A good rule of thumb would be to give half of what the politicians ask for.”

And, as economist Walter Williams reminds us about federal spending, "If 10 percent is good enough for the church, it ought to be good enough for Congress." 

As we have incrementally increased spending as a percent of GDP, now we must begin to incrementally return to the spending level before 1930. 

Cross-posted from Observations

1 comment:

  1. You have brought up some really good points. Thank you. Just shared it with friends..

    ReplyDelete