Government Spending: Where Will the Money Come From?
"Money doesn't grow on trees, young man."
Growing up in a family with five children, I heard that expression often enough. It meant that some wishful-thinking request, however pleasing an idea, would cost more money than our family could afford. It wasn't a bad thing; just reality that limited means cannot sustain unlimited wants and desires.
Choices must be made and budgets must be respected. Disappointment followed perhaps, but no hard feelings. Dad was not a bad father because he could not satisfy my wishes. Life is about choices. It was a good lesson to learn.
Get Our Latest News for FREE
Today, I think most people believe that for the government, if not for themselves personally, money really does grow on trees. Encouraged by the magic of Keynesian Economics, politicians have been allowed to spend $20 trillion more than they collected in taxes.
The G.W. Bush and Obama administrations accounted for $14 trillion of that total. That is almost the entire production in a year for the whole country! And all that spending is in addition to the taxes the government collected and spent! And it is in addition to the trillions in benefits promised to Social Security beneficiaries and Medicare beneficiaries above what FICA taxes will pay for.
Spending is so free and easy; it simply must be the case that money grows on trees.
Furthermore, the large increase in deficit spending has not (yet) resulted in a Greece-like disaster. Lightening has not struck the Treasury Building. Interest rates continue to be low. Why not let the good times roll? There are so many other "good" things to be done. Expand school lunch programs, increase eligibility for Medicaid, enroll millions more onto food stamps, offer "free" college to high school graduates, give subsidies to rich people so they can buy a Tesla, and so on.
There is no limit to the pleasing ideas from politicians seeking to win support from voters. Apparently, there is also no limit to the supply of money available to be spent by our government.
Some political leaders, influenced by a strain of Keynesian economists, really do believe that when the government wants more money, it can simply create more of it. The theory is known as Modern Monetary Theory (MMT). A perverse interpretation of the theory says that deficits lead to prosperity, and balanced budgets (aka austerity) lead to economic hard times. It is the Progressive version of voodoo economics espoused by overly enthusiastic supply-siders.
Although they may not wish to acknowledge MMT (since it sounds so bizarre to the common man with common sense), the theory gives cover to politicians to spend whatever they want with no financial discipline. The government is no longer constrained by the need to raise taxes from productive people. They simply create more money to do whatever they want. It is especially easy to do this with a cooperative Federal Reserve Bank, such as helped President Obama so mightily.
During the Reagan era, there was a vain hope that tax cuts would "starve the beast", based on the old-fashioned idea that government could only spend what it collected in taxes from the people. But as Milton Friedman said, "Keep your eye on one thing and one thing only: how much government is spending, because that's the true tax."
Presidents Bush and Obama have demonstrated 14 trillion times that tax revenues are no constraint on spending. How then do the people control the size of government? Are we stuck with a government that grows bigger and bigger until it collapses from its own weight? Is there a limit to the supply of money for the government to spend?
Suppose there were clear limits. Then, just like my family growing up, Americans would readily learn and adjust their wishes to the available supply of money. But without clear limits, it is so much harder to rein in wishful thinking.
There is much that is not right in politics in America today. One cause of our turmoil, in my humble opinion, is the lack of a clear limit on what the government can spend.
Lacking such a limit and believing that government has unlimited access to money, good people feel morally obligated to advocate for using "free" money on pleasing ideas like free stuff for themselves and other deserving people. Surely it is not farfetched to advocate for expanded school lunch programs, greater health care benefits, "free" college, more subsidies for green energy, and so on and on and on. Only a Scrooge (or a Republican), would deny such good things.
It will be very difficult to restore order in political discourse until there is wide agreement among the people on a limit to how much government can spend. A clear limit won't eliminate strong disagreements about priorities, but it will reduce the moral posturing that is poisoning the current debate.
It won't be painless to relearn the truth that money doesn't grow on trees. Economists (excluding Austrian school economists) have much to answer for. Fiscal restraint started a slow death with Keynes; it took a turn for the worse when Nixon, cheered on by non-Austrian-school economists (especially Milton Friedman, by the way), ended the last vestiges of gold-backed money and birthed MMT. Fiscal restraint finally ended when Vice President Cheney, cheered by supply-siders, proclaimed that "deficits don't matter". The chickens may not yet have come home to roost, but they are surely on the way.
