The Spendaholics' Offensive
Editor’s note: A version of this article first appeared at Forbes.com.
A primary meme of the Democratic Party in 2013 is that the federal government doesn’t have a spending problem. That is what President Obama reportedly said to House Speaker John Boehner (R-Ohio) in their January budget negotiations. Acting on that assumption, Obama’s State of the Union address signaled his desire to scuttle the 2011 sequestration deal that appears to be the American people’s last best hope to trim federal spending.
The president’s partisan allies have rushed to take up the cause. Two days after the State of the Union, Iowa Senator Tom Harkin (D-Iowa) stated, “I want to disagree with those who say we have a spending problem.” House Minority Leader Nancy Pelosi (D-Calif.) recently took up the refrain, telling Chris Wallace on Fox News, “It is almost a false argument to say that we have a spending problem.”
With these statements, the political battle lines for 2013 have been drawn. The Democrats don’t even want to talk about spending cuts. For them, the only desirable option is to continue what Washington has been doing for decades regardless of which party was in power – spend more.
With apologies to anyone struggling with alcoholism, a U.S. senator earnestly insisting that he and his colleagues don’t have a spending problem is like an alcoholic denying that he has a drinking problem. While the problem is obvious to some, the senator is stubbornly in denial, not yet ready to face the unpleasant reality.
Harkin’s fellow Congressman, House Minority Whip Steny Hoyer (D-Md.), recently articulated his party’s agenda, declaring, “The country has a paying-for problem,” not a spending problem; in other words, full speed ahead with spending while we look for more tax revenues.
Nobody, however, believes that Congress will raise taxes enough to pay for all the spending that is forthcoming, sequestration or no sequestration. Instead, Washington will continue to spend more today while sticking future taxpayers with the bill by borrowing to cover the deficit.
The spendaholics charge ahead because they know they can borrow whatever they need. If Uncle Sam didn’t have the power to tax, it would be considered a lousy credit risk. Taking into consideration over $16 trillion of “official debt,” several trillions more of off-budget indebtedness, and perhaps as much as $200 trillion of unfunded liabilities, the risk premium attached to a borrower with negative net worth and insufficient revenues would result in interest rates far higher than today’s abnormally low rates.
By cramming down interest rates, the Federal Reserve has become the federal spendaholics' enabler. Like many homeowners during the housing bubble last decade – who paid more for their houses than their income could support, only because creative financing enabled them to “tote the note” for a while – so, too, is the federal government able to borrow enough to avoid its day of reckoning: the universal recognition that it can’t possibly make good on its obligations – because of the Fed’s financial engineering.
Why? Here’s one reason: power. Spending equals power.
All this government spending makes our society poorer, because such spending is “acatallactic” (a fancy economic word that means government spending withdraws scarce economic resources from the free markets and diverts them into the public sector, where they will be directed by political decisions into less-valued uses). The evidence that Big Government leads to economic anemia is overwhelming, whether in the extreme cases of socialistic governments that have commandeered entire economies to democratic interventionist states or where the dose of statist poison is smaller, but the positive correlation between size of government and slowness of economic growth remains.
How can the spendaholics get away with policies that don’t make economic sense? Because they make great political sense. Democrats have seen how Europeans have taken to the streets to protest any and all budget cuts by Europe’s broke governments, and they know that tens of millions of Americans are more concerned about continuing to receive federal benefits today than some potential financial Armageddon tomorrow.
Think of how George W. Bush and a Republican Congress acted like spendaholics when they were in power. This shows how difficult it will be for federal spending ever to be curbed. The fundamental problem isn’t so much partisan as it is systemic. In a democratic system, politicians win elections by doing what attracts the most votes. Since voters like to receive benefits from government, but don’t like to be taxed to pay for all those benefits, all the incentives are for politicians to adopt policies that increase spending faster than revenues.
This will all end badly some day when “the market” asserts itself and sweeps aside the rotten debris of spendaholic policies abetted by a compliant central bank. Until that day, though, the spendaholic binge will continue.
Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.