The Obama administration has sobering news about the federal government’s propensity to spend more than it collects in tax receipts (http://www.whitehouse.gov). During 2010, the administration projects spending of $3.7 trillion, tax receipts of $2.2 trillion, and a whopping $1.5 trillion deficit.
With a population of 309 million, projected federal government spending amounts to more than $12,000 for every man, woman and child in America. The projected deficit amounts to more than $5,000 per person. Put differently, the federal government is spending $1.72 for every $1 that it takes in. Is such fiscal irresponsibility the solution to our economic problems?
When the state of Kansas wants to increase expenditures, it has to cut spending on other programs or raise taxes. The federal government can increase spending by raising taxes, borrowing or printing new money. Raising taxes is the least popular option. Voters and special interests like government spending and Congress always postpones having taxpayers pick up the tab until after the next election.
In the short run, an increase in government debt can have little effect on interest rates and seem like a painless way to fund the deficit. That’s what’s happening now. The sharp recession and financial collapse have depressed private borrowing so interest rates have remained low. That happy situation is about to end, however. The recent explosion in federal debt is nearing a “tipping point” where bond buyers demand sharply higher interest rates. Given the unprecedented size of the federal deficit, and the corresponding explosion in national debt, it’s hard to project just how high interest rates are headed. Without sharply lower deficits, however, it’s easy to see how double-digit interest rates of 10 percent or more are in the offing.
Simply printing money sounds like an especially attractive way of funding new government spending except that it inevitably leads to inflation. If the amount of money grows faster than the rate of growth in the goods and services available for consumption, higher prices are inevitable. Again, the sharp recession and financial collapse have depressed consumer and business demand, so inflation has remained low, so far. As the economy begins to recover, however, private-sector demand will pick up and so will inflation.
At best, borrowing to pay for federal spending, or simply printing new money, are shell games. At worst, they are a fraud on the taxpayer. They represent hidden increases in future taxes that have not been agreed to by taxpayers. Politicians like hidden taxes; the federal budget typically runs a deficit. A small surplus was only achieved in two of the last 50 years, in 1999 and 2000. Hats off to the Clinton administration for fiscal responsibility!
Exploding deficits are new phenomena. The “conservative” Bush administration can be blamed for getting the process started; the Obama administration must take responsibility for outspending even the Bush administration. Shame on both Republicans and Democrats.
Raising taxes on the “rich” is a popular idea for reducing the deficit but there aren’t that many “rich” taxpayers. In 2010, income tax receipts of $951 billion are projected for all individual taxpayers; you could double everyone’s personal income taxes and still have a huge federal deficit. Cutting spending is the surest way of reducing the deficit, but that's unpopular with spend-and-elect politicians. You would only dent the current deficit if you eliminated the Departments of Energy ($28.3 billion), Education ($49.7 billion), Transportation ($77.6 billion), Interior ($12 billion), Labor ($14 billion), HUD ($41.6 billion), Agriculture ($23.9 billion), and Commerce ($8.9 billion). Simply reducing the size of traditional government programs will not close the deficit.
The really big numbers in terms of federal spending are in Social Security ($715 billion), Medicare ($451 billion), and Medicaid ($275 billion). Such spending is exploding because eligibility has been greatly expanded over time, medical costs are rising, and aging baby boomers are beginning to tap the system. Spending has far outstripped taxpayer willingness to pay for these health-care “entitlements.”
It is neither liberal nor conservative to advocate new health-care entitlement spending under the current budget situation; it is irresponsible. Current obligations must be funded before new ones are incurred. You and I cannot get away with spending $1.72 for every dollar of income, neither can the federal government. “You can fool some of the people all of the time, and all of the people some of the time. But you cannot fool all of the people all of the time.”
— Mark Hirschey is the Anderson W. Chandler Professor of Business at Kansas University.