Let me state what this article is NOT about. I am not going to address what we spend our money on. I would like to simply laser in on how we handle the financials in our government bodies, particularly the example of our federal government. We don’t need to address the specifics of priorities or of this or that program decision in order to come to a general agreement that our nation is currently on an unsustainable fiscal track.
We cannot continue to overspend our national government income by over 40% (Source: CBO estimate, FY 2012) year after year after year. In the long run (probably more like the medium run at this point) it is utterly unsustainable and we see examples of the political and economic consequences of ignoring this reality when we look to the current situations of Greece and others.
Thus regardless of our opinions on the place of government in our lives, we likely can generally agree that our financial house needs to be put back in order.
The question then becomes, how can we accomplish this? The simple answer brings us back to a certain ideological divide. Do we lower government expenses, increase government income or some combination of the two?
With the Republican and Democrat nominating conventions wrapped up, there is one inevitable campaign theme that will begin coming to the forefront.
Like those old Miller beer ads arguing the preeminence of “Great Taste!” vs “Less Filling!”, the voting public will again be caught between opposing sides of “Cut Spending!” vs “Raise Taxes!”
For some these phrases (and their variations) may be empty political rhetoric, pulled out of drawers of talking points, representing little of ideological substance. To many they reflect their fundamental understanding of the differences between our political choices at the national level. Fiscally responsible against spendthrift, caring versus callous.
In general though, politicians, pundits and other public intellectuals don’t want to be particularly clear about their intentions in this debate. “Spending cuts” can sound like cuts to a program that will help me or hurt people I care about. “Raising revenues” can sound like just more taxes and money out of my pocket. Thus to be fair, I must admit that the discussion is rarely as blunt as “Spending vs Revenues”. It is couched many ways. Cuts are re-named “elimination of redundant programs” or “controlling costs”; increased taxes are presented as “revenue enhancements” or “reducing tax expenditures” (basically eliminating deductions).
However it is phrased though, this debate (along with others)will once again heat up as we draw ever closer to the November election. Thus I felt this was a good time to take a look at the history behind these two opposing views and more particularly the most recently favored semantics in the discussion, the touted “balanced approach“.
This strategy, simultaneous implementation of spending cuts and revenue increases in some combination, has been promoted widely during our most recent national budget debates. President Obama, the co-chairs of his blue ribbon deficit reduction committee Alan Simpson and Erskine Bowles, billionaire financier Warren Buffett and innumerable others have all been heard echoing a refrain supporting a “balanced approach”.
It certainly appeals to our innate sense of fairness. It rings with the sound of admirable compromise. As mentioned we know where each side stands reflexively at the national level, so when Democrats take up the banner of “balance”, when they agree to cut spending in return for some revenue increases, this can only appear as well intentioned negotiation.
If we take a snap shot of government (all the programs, laws, taxes, spending, etc.) in one moment of time, the combination idea (the “balanced approach”) certainly seems the best. In one moment of time, all choices should appear equal.
It would be like choosing paint for a room in your house. I can paint it yellow or I can paint it blue. There is no objective difference between the two, they both cover the walls just fine and get the room painted. You could paint the entire room blue, or the whole thing yellow, or some mixed use of both. No matter how we choose, the job’s done. Good work.
However, few people would find it reasonable to paint a room without considering the whole house. Generally they wouldn’t make a decision based on just that one room, just one snap shot. They would look at the rest of the rooms in their home, they would think about prior paint picks. They would make the current choice in relation to how it fits in with past choices.
So how do our current financial options (cut, raise, balance) fit into the choices our lawmakers have made in the past?
One straightforward way to consider this is to look at our economy’s total activity relative to our federal government’s total revenues and expenditures over time.
Below I have included the figures for the beginning of each decade since the year 1800 (Source: US Census Bureau, http://www.census.gov/compendia/statab/past_years.html).
So what do we see?
Until 1920, with the limited exception of 1865-1875 (Can anyone in the class tell me why?), our tax revenues fluctuated between 1.5% and 3.5% of GDP. Which means, at minimum for the first 150 years of our country’s history, 96.5% of all our national production stayed in the private economy.
Until 1920, with that same exception, expenditures also stayed low, between 1.2 % and 3.0% of GDP. Generally the federal government ran very small deficits or near net zero. Only a few times for wars did the US run significant deficits, and even those debts were effectively paid to zero quickly.
Finally, prior to 1930, we see broad use of both revenue increases AND spending cuts used to manage the Federal budget. Legitimate “balance” in the budget making process at the Federal level.
However, around 1920, several things happened. The modern Federal Reserve system was established, the income tax was constitutionalized and the IRS was created. Further we saw a number of US presidents over the period from 1920-1940 (Wilson, Hoover & Roosevelt) inclined to employ more direct and wide spread governmental activity in the national economy. From the institutional changes enacted by Wilson; to the expansion of regulatory authorities, trade restrictions and activist monetary & fiscal policies of Hoover; to the wholesale interventionism of Roosevelt’s “New Deal” period.
Since then (see above) we have been on an almost non-stop track upward in both revenues AND expenses.
We see annual revenue increases (in proportion of GDP) rising continuously for over 50 years straight, topping out at over 20% of our whole national production.
All that extra money might have been great except that we see also expenses rise for over 60 years straight. When we finally got around to cutting costs we only dropped them down to a level from a couple years prior and then only a few years later, completely wiped out those savings and dropped the most massive spending increase since World War II on top bringing our Federal spending up to almost a quarter of our entire economy.
What has this strategy gotten us? Check out the right hand column… A deficit (and debt) that creeps higher and higher over the decades with only brief respites.
Then after 80 years of creep, around the turn of the millennium, our Washington politicians seem to have finally lost all connection to reality. I would argue that after decades of using over-complicated econometric math to pretend that long-term structural deficits don’t matter, that there was always some “emergency” that had to be tended to before we had to get the fiscal house under control, that we could “grow” (or inflate) our way out of any deficits we posted, that as the world’s newest reserve currency we had a blank check to borrow and spend at “guaranteed” low interest rates, after all of that and more Washington DC seemed to finally feel they could do anything and it wouldn’t damage our economic prospects or endanger our country’s ability to borrow.
So to put a cherry on this cake, the last 10 years, through President Bush and continuing under President Obama, have been a never-ending series of tax cuts and spending increases. From wide spread generational level tax cuts in Bush’s term to “targeted” decreases under Obama. Massive new entitlements, increased foreign aid, Federal stimulus and war spending have occurred under both. All of this left us in 2010 with the most wildly off-kilter federal balance sheet in the history of the country with only 15% revenue covering over 24% in expenses, and a single year deficit which exceeded 9% of total GDP.
So we end up with what looks like two quite different US government “houses” (or at least two distinctly different property managers).
One, for the first 120 years where we balanced our options (a bunch of blue AND a bunch of yellow). A second, where we spent 80 years painting almost every room yellow and then finally just said, “Forget it!” and started ignoring that the “painting” needed to happen at all.
Is it still reasonable for politicians to act as if it is a 50/50 choice between the two colors? That once more painting another of our financial rooms yellow is an equal option to painting the room blue?
After the last 90 years we have a great big yellow house and I’m very tired of yellow. It’s time for some blue, and it is frighteningly disingenuous of those arguing for ever more yellow (whether that is a tax on the “rich”, or a national sales tax, etc.). To act like this is still a choice between equals, that we should still be balancing these options, is to reveal an unacceptable ignorance of history or a willful blindness.
The only choice that would be “balanced” is to start painting with blue again. In our current situation the balanced approach is to start cutting spending.
We have proven we can gather the political will to increase taxes and revenues. We have done it over and over again for the past century. All those increases have gotten us nothing but more spending, not the righting of our financial ship that is so desperately needed.
After 90 years of almost never ending increases on both the tax burden to the US’ citizenry and the blank check spending of Washington DC, it is not “balanced” to come to the American people with hat in hand saying, “Hey, just give us a little more this one last time, we promise we’ll keep it under control this time.”
During President Reagan’s administration the phrase “starving the beast” was popularized with the theory that if we cut revenues, cuts in spending would naturally follow. That if we squeezed down income, it would lead responsible lawmakers and presidents to rein in expenses without us having to fight directly on the spending front, without having to stand clearly and openly on the side of, “Cut spending.” But what we’ve seen is, no, they’ll just keep on keepin’ on, with no regard for fiscal sanity (“they” on both sides of the political aisle). And thus the debate must now be direct, clear and straight forward.
NO NEW SPENDING and we must cut back on what we are already doing.
This year our government is on track to take 17% out of our entire economy in various tax collections and they are going to spend the equivalent of 20% (Source: Federal Reserve of St Louis). A far cry from the 2.6% they took and 2.5% they spent as recently as 1910.
This has to stop and the debate must be on the spending side.
For my Norquist pals out there, once we have comfortable, sustained surpluses and returned to healthy debt levels, we can discuss our actual tax levels and structure. Alan Greenspan argued for this in 2000 during the debates over the Bush era tax cuts. Friedman, Hayek and many other economists over time have also agreed that healthy debt levels come before cuts in government revenue sources.
I don’t believe this can happen overnight. A car stopping suddenly is called a “crash” for a reason, but we do need to solidly and steadily start applying the brakes on what has become an out of control federal intrusion into our wallets and lives. In the end, while you don’t want to slam on them and send your self into a skid, that wall is ahead and you do only have so far to get yourself stopped before that brick and mortar is going to do it for you. If you’ve ever been in an accident you know it’s a whole lot more pleasant to get yourself slowed down and stopped on your own, than letting the back bumper of that guy in front of you do it.
I also don’t believe that deficits and debt are necessarily a bad thing. Alexander Hamilton, our first Federal treasury secretary and one of our nation’s founders, argued that national debt is the key to trade and the global economy. He asked why foreign companies would engage in credit transactions with new American corporations? He argued that national debt and lending of some amount was the starting point of all credit and foreign trade. That the “full faith and credit” should stand behind our economic system and we should prove that by engaging in government debt activities.
Our government debts and lending with other nations and creditors create the baseline connections on which our corporations can build. They create the meaningful, enforceable ties with others outside our country that allow foreign nations and countries to believe we will hold our citizens and their companies to account for their activities on the world stage. If we don’t hold our own citizens to account in their contractual dealings outside our nation’s borders then those other entities may feel they don’t have to honor the contracts they have signed with our Federal government.
In our lives we are often faced with situations like renting our first apartment, buying our first car, taking out our first mortgage or starting a business and needing a loan. Sometimes the only way to have these transactions approved is to add a co-signer (often a parent). The primary borrower (us) is an unknown, untested entity. The lender or potential customer/client has little or nothing on which to base the required trust needed for the requested economic trade.
But a parent has existing relationships and history (bank accounts, loans, business experience, established credit scores, etc.) on which to base decisions. The lender or other creditor, knows that if they have our parent’s guarantee as well as our own, not only will the parent assist in holding us accountable for fulfilling the terms of whatever contract we are trying to enter into, they can also directly hold our parent to account should we end up defaulting on the agreement.
In Hamilton’s calculus the US Federal Government is the initial co-signer for American industry. They get the ball rolling by setting fiscal and monetary policy, establishing a reliable judicial system and making the first financial transactions across national borders in the forms of lending and borrowing.
American industry doesn’t continue to lean on American government once they are established in world markets, just the same as we as individuals do not continue to have our parents co-sign for us once we have our first credit cards, bank accounts, and mortgages. Once we are established with our own credit and business history we stand on our own, but that first introduction, that first hand hold into credit and trade markets is the catalyst which often allows for everything that follows.
However, in both cases, this crucial first opportunity relies on an underlying assumption.
For us as individuals it assumes that our parents are credit worthy themselves. If they personally are buried with unsustainable debts or have a poor history in their business and credit dealings, their referral for us will be worth less (potentially far less). Possibly it will not be worth enough to earn us that all-important first opportunity.
For our American industries it assumes that the US government is a good bet. And the better the bet the better the terms our companies will receive from the world. The more responsibly our Federal government manages their fiscal house the better their financial “children”, our US corporations, will be treated in the international market.
Some disagree with this, but I believe that we as a nation benefit from a well-established and active credit history the same as a mortgage and credit card can be a benefit to our personal finances. However, just as in our homes, we must diligently protect and manage our fiscal life. For the past 90 years we have been acting as an irresponsible borrower, who takes out money they don’t have, to over spend today, assuming our children will take care of the debts when we’re gone.
I like to think that our first responsibility as parents is to ensure we leave our children better off when we are gone.
Continuing to increase spending, increase taxes, with “balance” nowhere on the horizon, running our country as if politicians can, with a magic word, reverse the basic fundamentals of financial discipline in the REAL (not IMAGINED) world can only lead to our children’s and grandchildren’s futures being saddled with the costs of today. The costs of everything we were happy to buy today but had no interest in paying for.
Whether it is for the taxpayers our children will grow into, or the companies that will employ our children, or the government programs our children will depend on for crucial services (fire, police, roads, etc.), let’s start finding political solutions that will allow us to begin a century of painting with that blue brush. Let’s leave our country in good financial shape, so our kids can just focus on living out the best lives they can imagine and don’t have to spend their precious time and money cleaning up after the mess we left them.