Spending Is the Problem, Not the Deficit

Thursday, September 13, 2012
Spending Is the Problem, Not the Deficit
by Jacob G. Hornberger

To understand why this country is in deep financial and economic trouble, all we have to do is examine the reasoning of the editorial board at the Los Angeles Times. The only reason I select the Times to demonstrate my point is that it just published an editorial on the federal spending and debt problem. But its analysis and "solution" can be found in any mainstream paper in the country and, in fact, could easily represent the thinking of most mainstream politicians.

The editorial is entitled " Moody's Sends a Message." The editorial's subtitle provides the importance of the message: "A threat to downgrade the U.S. credit rating is a warning that it's time to get serious about the debt."

Consider the lead paragraph to the piece: "In case anyone had forgotten, Moody's Investors Service issued a stark reminder Tuesday that the federal government is speeding headlong toward a political and financial cliff…. temporary tax cuts are due to expire…. Washington is expected to reach the limit of its borrowing authority, necessitating another increase in the debt limit. If lawmakers and the White House can't reach a budget deal that effectively manages those problems, Moody's said, it expects to downgrade the federal government's credit rating."

So, it's obvious that the Times recognizes the severity of the problem. The government is borrowing too much money. The total amount of its outstanding indebtedness continues to mount. While Congress sets a debt ceiling that limits the total amount of debt, Congress continues to raise it whenever it's reached.

So, what must be done to resolve this problem? It seems to me that the answer is easy to see. When someone is borrowing too much money, that means he's spending too much money. So, isn't the solution obvious? Just reduce spending so that it equals the income.

So, is that what the Times recommends?

Not exactly, which is what makes the editorial so ludicrous. According to the Times, reducing the debt "will require Democrats to agree to slow the growth of federal spending, particularly on healthcare entitlements such as Medicare and Medicaid, more than President Obama's budgets have proposed. It will also require Republicans to agree to raise taxes, which Democrats have rightly made a precondition to any deal."

"Slow the growth of federal spending"?

What?

Let's break that down to see how utterly ridiculous it is.

Suppose my annual income for the past five years has been $50,000, which I use to pay for basic living expenses. However, for the past five years I've spent an additional $50,000 per year for extra stuff. To get the money to pay for the extra stuff, I went to the bank and borrowed $50,000 per year, which means I now owe the bank $250,000.

My plan this year is to again spend $100,000 ­ $50,000 of my income on basic things and another $50,000, which I plan to borrow from the bank, to pay for extra stuff.

However, I come to the realization that my position is growing increasingly precarious. The bank is indicating that it might not roll over my notes when they come due. That is, the bank is saying that it might demand full repayment of the notes.

What I am to do? I know! I'll go talk to my friends at the Los Angeles Times. They'll know what I should do. They're experts.

And sure enough, they give me the solution to my financial woes. They tell me that I need to slow the growth of my spending. So, instead of spending $100,000, I just need limit my spending to $95,000. In that way, I have to borrow only $45,000 instead of $50,000.

But wait a minute! How does that solve my problem? My total accumulated debt is $250,000. That's what the bank is complaining about. How is it going to solve my problem is I add another $45,000 to my total indebtedness? Sure, an additional $45,000 of debt is less than an additional $50,000 of debt, but it still increases my total accumulated debt to $295,000.00

And that's what the Times just doesn't get. Slowing the growth of federal spending isn't the same as reducing the overal level of federal spending. It obviously doesn't solve the problem because it continues to pile debt on top of debt.

The only solution is to my personal financial problem is to cut out all the spending on extra stuff. That would mean that my income and spending would equal out ­ $50,000 in income and $50,000 in spending. No more borrowing. My accumulated debt would be limited to $250,000. That would be my "debt ceiling." Then, to pay off the debt, I would have to lower my spending on basic items so that I will have some extra money to use to pay down the debt.

The same principle applies to the federal government. Reducing the growth in federal spending doesn't solve the problem. The government has to reduce federal spending itself, not the growth of federal spending. And it's got to reduce it to the point where income (tax revenues) equals spending ­ that is, to the point where there is no more borrowing and, therefore, no more adding onto the total accumulated debt.

What about the Times+ suggestion that taxes should be raised to cover the difference?

That would be the worst thing to do.

Keep in mind that the standard of living of people in society depends on the growth of productive capital in the private sector. More capital means better tools which means increased productivity, which means higher real wages for workers. Thus, the more that government sucks out of the pockets of the private sector, the worse off people are because that is depriving society of that much productive capital. It's not a coincidence that people living in countries that have large government sectors (e.g., Cuba and North Korea) have lower standards of living than people who live in countries that have smaller government sectors.

Keep in mind, also, that those who receive largess from the government are dead-weights as far as productivity is concerned. A soldier doesn't produce wealth; he consumes wealth that has been taken from the private sector. The same applies to every other bureaucrat or government contractor.

And it doesn't matter whether the government is taxing people to pay for all that dead-weight or borrowing from people to pay for it. Either way, it is sucking wealth out of the private sector, thereby reducing people's overall standard of living.

So, the Times' suggestion that the government should raise taxes is clearly wrongheaded. All that does is suck more productive capital out of the private sector.

What about the unemployment that would arise from a drastic reduction in federal spending? Well, yeah, much of the dead-weight would have to be laid off or would simply go out of business. But that would mean a doubly positive economic effect. For one, people in the private sector would now be able to keep the money that was previously being taken from them. For another, the people who were part of the dead-weight sector would also now be back in the private sector, producing wealth and capital rather than consuming it.

Thus, the real problem America faces is simply federal spending ­ not the deficit, just federal spending. All that needs to be done is reduce spending down to the level of income, even if that involves layoffs in the public sector. Slowing the growth of spending is obviously no solution at all, and raising taxes does nothing more than aggravate the overall problem.

Of course, the ideal solution is simply to eliminate, not reform or reduce, all welfare-state programs and all warfare-state programs. But heaven forbid that anyone suggest that to the LA Times. They'd go into a state of apoplexy.

http://www.fff.org/blog/jghblog2012-09-13.asp