Friday, December 26, 2008

(Not) Paying for Government

(Not) Paying For Government
October 27, 2004

Americans are metaphorically drunk. We are living under the delusion that we do not need to pay for government. We love politicians who cut our taxes while increasing government services. We’ve had too much to drink at the party, but the host is talking us into just one more. The hangover is coming. And the party host won’t be around to deal with it. The politicians who get us all liquored up will be long gone when the country is huddled over the toilet.

The public debt is close to $7.5 trillion. This is the net amount of money borrowed by the U.S. government since its inception. In the first 200 years of U.S. history, the federal government accumulated less than $1 trillion of debt. In the last 25 years, we’ve added $6.5 trillion. So the baby boom generation has enjoyed trillions of dollars worth of government services it has not paid for. In the midst of a war and increasing concerns about homeland security, you might think Americans would be willing to contribute more to financially support the government. Yet, we insist on further tax cuts. Americans are incredible hypocrites. We profess to support the spread of freedom and democracy around the world, but are unwilling to pay the costs of doing so.

The American political system is biased toward fiscal irresponsibility. We don’t like politicians who tell us it’s good for us to pay our bills. It’s like your mother telling you to eat your vegetables. We much prefer the babysitter who lets us eat cake and ice cream for dinner. But gorging ourselves on sweets leads to an upset stomach.

Some astute members of Congress found a way to control the political bias in public finance. The 1990 Budget Enforcement Act initiated a pay-as-you go rule (commonly referred to as pay-go). Under pay-go, any increased spending on entitlement programs (such as Social Security or Medicare) or tax cuts must be offset by reductions is government spending or tax increases. Prior to pay-go, it was too easy for Congress to spend money or cut taxes without concern for its effect on the federal budget. And the program was extremely effective in enforcing fiscal discipline. Most analysts think the pay-go rule deserves much of the credit for the federal budget surpluses of late 1990s that began to pay down the huge public debt.

Some politicians don’t like to eat their vegetables, however. They want to enjoy government services and not pay for them. So the House of Representatives recently abandoned the pay-go provisions applied to tax cuts. And the result has been a return to massive budget deficits. This year alone we’ll add half a trillion dollars to the public debt.

A contributing factor to this fiscally irresponsible behavior has been declining interest rates, which have reached their lowest levels in forty years. When it’s cheap to borrow money, it’s easy to ignore the costs. But the only direction left for interest rates to move is up. Higher interest rates will require larger government expenditures just to pay the interest on the borrowed money and significant increases in taxes or reductions in government services to reduce the public debt. Future generations, including today’s college students, will bear the costs of this behavior. So have another drink or piece of cake and enjoy the party. But the pain is coming. Pass the Pepto-Bismol.

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