September 29, 2002 | Commentary on Federal Budget
"If we don't … reaffirm our commitment to fiscal responsibility, years of hard work could be squandered," Federal Reserve Chairman Alan Greenspan told a congressional panel last week. One look at the ever-climbing spending levels on Capitol Hill these days, and his warning makes perfect sense.
It didn't used to be this way. In the mid-1990s, politicians courageously cut wasteful government spending in order to balance the budget and bring relief to overtaxed families. Since 2000, however, our elected representatives have been acting more like children in need of adult supervision. Almost daily, it seems, another newspaper article begins: "Congress approves record spending increase for …"
With the 2003 federal budget almost done, there is now a price tag for this 2000-2003 spending spree: $782 billion in new spending. Not $782 billion in total spending, mind you, but $782 billion above what Washington spent in the previous four years. Eventually, taxes will need to be raised by over $5,000 per household to pay for it. With the exception of World War II, on a per-household basis, 2000-2003 will become the largest four-year federal spending spree in American history.
How did Congress and the president add so much new spending? Did they carefully assess the nation's needs and then decide that one or two national priorities were worth $782 billion in added funding? No. It's a classic case of death by a thousand blows -- record spending increases for dozens of diverse medium-sized programs, none by itself fatal but collectively all lethal. These scattered spending hikes flow from the inability of undisciplined policymakers to set priorities and say no to special interests.
Many members of Congress have tried to blame Sept. 11th-related defense spending. While this seems plausible on the surface, new defense spending represents just 21 percent of the $782 billion total spending increase, and less than a quarter of that defense spending increase can be directly attributed to the war on terrorism. Although a convenient excuse, defense spending comprises a surprisingly small portion of this spending spree.
Others claim politicians have acted responsibly, but that big-ticket entitlements such as Social Security, Medicare and Medicaid are growing uncontrollably. However, these program's budgets haven't grown any faster over the last four years than they did over the past two decades. They don't explain why recent spending increases exceed those of the 1990s.
In fact, there is no way to explain or excuse the general pattern of persistent fiscal recklessness one finds in the federal budget. Over the past four years, Washington has heard calls for massive spending increases for a diversity of programs: farm subsidies, highways, healthcare, defense, homeland security, you name it. Had policymakers performed the tough but responsible task of limiting spending increases to one or two of the highest national priorities, the costs could have been controlled. Instead, they simply threw vast sums of money at all of these programs. The result: an unaffordable "guns and butter" budget.
Congress and the president couldn't say no even to the lowest-priority programs. Few taxpayers can claim the Denali Commission (an Alaskan public-works program) enriches their lives. But Washington increased its four-year budget from $1 million to $169 million. How much of a national priority is the Bureau of Export Administration? The Maritime Administration?
The Foreign Agriculture Service? Most Americans have never heard of these obsolete agencies, yet Congress and the president have increased each of their four-year budgets by over 70 percent.
From 2000-2003, Washington was blessed with a rare opportunity to save the average household nearly $2,500 in taxes without cutting back any federal services. After 50 years of steady increases, interest payments on the national debt declined by $247 billion from 2000 to 2003, thanks to the balanced budgets of the 1990s. Like the post-Cold War "peace dividend," Congress and the president were granted a once-in-a-lifetime "interest dividend" of $247 billion.
And they squandered every penny of it.
They allocated all $247 billion to new spending, and when that money ran out, spent $782 billion more on top of that. That's $1.029 trillion in new non-interest spending in just four years -- the largest increase since World War II.
More seems to be on the way. Congress and the president may spend as much as $600 billion over eight years for prescription drugs. Senators have endorsed a 600 percent increase for Amtrak. The House of Representatives passed legislation doubling the National Science Foundation's budget. The Senate just passed a bill adding $6 billion in farm subsidies despite the recent enactment of a record $180 billion farm bill. No one is proposing rolling back any of the 2000-2003 spending increases for pay for these new priorities.
What's wrong with unrestrained federal spending? Some mistakenly believe that government spending stimulates the economy. But they forget that every dollar the government spends must first be taxed or borrowed from someone else. Instead of creating wealth, government spending merely shifts it from one person to another. If government spending helped the economy, the Soviet Union and China would have become the world's richest nations.
In reality, most government spending actually harms the economy, which translates into fewer jobs and lower incomes. Governments are necessary to provide the collective services that markets need but have difficulty providing, such as defense, law enforcement and public goods like roads. But government spending beyond that basic level hurts the economy for three reasons:
1) Diminishing Effectiveness. As governments expand beyond defense, law enforcement, and public goods into areas such as education, food, housing and income security, they inevitably block the market from performing its own necessary functions in these areas. Over time, big government becomes a barrier to economic growth.
2) Politics. Markets use the profit motive to ensure that money will be spent efficiently. Businesses seeking profits must consistently respond to consumer demand with quality products at low prices. Governments, by contrast, are monopolies in which the only "profit" to the politicians running the system is re-election. Consequently, government spending is often driven by politics, not by efficiency. The result: While markets helped the Model T evolve into the Porsche and the Apple IIe into supercomputers, the federal government continues to run many of the same obsolete federal agencies it established as far back as the 1800s.
3) High Taxes. Increased government spending raises taxes for working families, making it more difficult for them to afford necessities such as food, housing and health insurance. Taxes haven't yet been raised because the federal government has chosen to borrow the money it needs for its current spending spree. But these loans eventually must be repaid with higher taxes.
In addition to their high cost, high taxes hurt the economy by distorting incentives. Families and businesses work, save and invest because they expect a financial reward. These productive behaviors also make the rest of the nation wealthier by creating additional economic activity. But burdensome tax rates reduce the financial reward for being productive. Families and businesses cut back their productive behavior to escape taxes, and the entire economy falters.
Washington's record $782 billion spending increase has harmed the economy, resulting in fewer jobs, lower incomes and higher future taxes. Fiscal discipline is needed. Otherwise, families will continue having difficulty making ends meet, and the economy will struggle under the suffocating weight of an ever-expanding federal government.
Brian Riedl is the Grover M. Hermann fellow in federal budgetary issues at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.
Originally appeared in the San Diego Union-Tribune