A Need for Fiscal
By John Hendrickson
government is facing a fiscal crisis. The federal budget is over $3
trillion, the national debt about $11 trillion, and the deficit for the
current fiscal year is close to $2 trillion. Over the next decade the
government will run an estimated $9 trillion deficit. Entitlement
programs such as Social Security and Medicare are approaching insolvency
and Congress is considering national health-care insurance, which would
create another entitlement at an estimated cost of $1 trillion. In
addition the federal government as well as some state and local
governments are witnessing declining revenues while the nation is trying
to recover from a serious economic recession. This also paints a bleak
picture for the dollar. In order to reverse course the federal
government must follow a policy of fiscal prudence, which requires
balanced budgets, reducing government spending, and reducing tax rates.
Riedl, who is the Grover M. Hermann Fellow in Federal Budgetary Affairs
at The Heritage Foundation, recently wrote that “federal spending, which
has generally remained between 18 percent and 22 percent of the GDP
(Gross Domestic Product) since the 1950s, would surpass 28 percent of
GDP by 2019.”
The increase in government spending is not only due to the recession,
but also the push for expanded government regulations and programs. If
federal spending continues and the Democrat agenda is enacted “federal
spending per household would rise from $25,000 in 2008 to more than
$37,000 per household by 2019.”
The nation faces a serious problem with unsustainable government
spending growth, and the deficits and debt that are the direct result of
this pursuit of federal expansion.
large deficits represent a systematic risk to the economy, worse, in my
view, than the threat of a crisis in the commercial real estate mortgage
market, which many think is the next shoe to drop,” wrote economist and
Hoover Institute Fellow John B. Taylor.
“Even worse, the President’s budget would borrow an additional $9
trillion over the next decade, more than doubling the national debt. By
2019, America will be spending nearly $800 billion on net interest to
service this large debt,” noted Riedl.
Entitlements represent another major problem. Both Social Security and
Medicare are in line to not only expand in terms of people needing their
services, but both are projected to go bankrupt. “Over the next decade,
the Congressional Budget Office projects that each year Medicaid will
expand by 7 percent, Medicare by 6 percent, and Social Security by 5
percent. These programs face a 75-year shortfall of $43 trillion…,”
stated Riedl. Entitlement costs “are projected to push the federal
public debt to 320 percent of GDP by 2050 and 750 percent by 2083.”
the spending problem and to pay for the Christmas wish list (national
health-care and environmental reform) of President Obama and Democrat
leaders would require substantial tax increases, which would cripple the
economy. A tax increase would not solve the revenue problem either —
only making the financial situation worse. “How much might taxes have to
rise? To close the deficit in 2019 when it is projected to be running at
a pace of $1.5 trillion per year, a 70 percent tax increase would be
needed, clearly damaging to the economy and both politically and
economically foolish,” noted Taylor.
Taylor also noted that the high deficits could bring high inflation
which would create further economic downturns and unemployment, while
confidence in the dollar would decline.
The nation’s foreign policy would also be
influenced as foreign nations such as China purchase portions of the
government is in the process of a large expansion, not only because of
the recession, but also the progressive policy preferences of the
Administration, which is hoping for the government to assume new
responsibilities in economic regulation, national health-care, and
environmental regulation. As Riedl noted:
War II, federal spending has generally remained between 18 and 22
percent of GDP. During the Bush administration, spending increased from
18 to 21 percent of GDP. This year, President Obama will spend a
peacetime-record 26 percent of GDP. Even by 2019, spending would still
be 23 percent of GDP — not even counting the President’s proposed health
plan. The 22 percent spending increase projected for 2009 represents the
largest government expansion since the 1952 height of the Korean War
(adjusted for inflation). Federal spending is up 57 percent since 2001.
course policymakers need to practice fiscal prudence which calls for a
balanced budget, cutting spending, reducing the debt, and cutting taxes.
These policies not only will bring the federal government back into its
proper constitutional line, but also encourage the private sector to
grow through economic liberty. The above policies were central to
President Warren G. Harding, President Calvin Coolidge, and Secretary of
the Treasury Andrew Mellon. In the 1920s, following World War I, the
Harding Administration was faced with an economic depression,
double-digit unemployment, and a war debt.
In order to
bring about economic recovery President Harding and Secretary Mellon
followed a policy of reducing government spending, tax cuts, and
reducing the debt — policies that not only worked, but were continued in
the Coolidge Administration. Mellon argued that balancing the budget and
paying down the public debt were two fundamental economic principles.
Mellon understood economics and he also studied the economic policies of
Alexander Hamilton. Mellon argued that it was “imperative that the debt
be reduced as rapidly as possible and that no further obligations be
incurred in the form of unusual or extraordinary expenditures.”
In a special address to Congress President Harding stated that he knew
“of no more pressing problem at home than to restrict our national
expenditures within the limits of our national income…”
Policymakers should look to the policy ideas of Harding, Coolidge, and
Mellon in addressing the fiscal emergency of today. Certainly President
Harding and Secretary Mellon would frown upon the uncontrolled spending,
increase of regulation, and policy proposals that greatly expand the
size and scope of government. Another remedy would be a balanced-budget
amendment to the Constitution to force Congress to balance the budget.
It is time for fiscal prudence to return to the federal government, but
in order for that to happen it will mean a change in how Americans and
politicians view the federal government. Former Senator Pete Domenici
writing in The Washington Times argued that “even more than
health-care reform or spending on remediation of global climate change,
deficit reduction must be task No. 1 for America. All the rest we do
will amount to very little if our economy collapses under the weight of
Hendrickson is a Research Analyst at Public Interest Institute.
views expressed herein are those of the author and not necessarily those
of Public Interest Institute or Tax Education Foundation. They are
brought to you in the interest of a better-informed citizenry.
Brian M. Riedl, “President Obama’s Agenda Would Bring $13
trillion in Budget Deficits, Not $9 trillion,”
Backgrounder, No. 2319, The Heritage Foundation, September
John B. Taylor, “The coming debt debacle: Top economist says
President Obama must slash spending now,”
New York Daily News, August 31, 2009.
Brian M. Riedl, “New Budget Estimates Show Unsustainable
Spending and Debt,” WebMemo, No. 2595, The
Heritage Foundation, August 25, 2009.
Riedl, “New Budget Estimates Show Unsustainable Spending and
Andrew W. Mellon, Taxation: The People’s Business, New
York: The Macmillan Company, 1924, p. 25.
Warren G. Harding, “Special Address to Congress,” Presidential
Papers of Warren G. Harding, April 12, 1921.
Pete V. Domenici, “Looking behind the curtain,” The
Washington Times, September 4, 2009.