October 2009

A Need for Fiscal Responsibility

by John Hendrickson

The federal 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.

Brian M. 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.”[1] 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.”[2] 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.

“These 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.[3] “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.[4]

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.”[5]

To solve 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.[6] 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.[7] The nation’s foreign policy would also be influenced as foreign nations such as China purchase portions of the debt.[8]

The federal 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:

Since World 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.[9]

To reverse 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.[10] 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.”[11] 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…”[12]

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 unprecedented debt.”[13]

John Hendrickson is a Research Analyst at Public Interest Institute. 

The 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.

[1] Brian M. Riedl, “President Obama’s Agenda Would Bring $13 trillion in Budget Deficits, Not $9 trillion,” Backgrounder, No. 2319, The Heritage Foundation, September 22, 2009.

[2] Ibid.

[3] John B. Taylor, “The coming debt debacle: Top economist says President Obama must slash spending now,” New York Daily News, August 31, 2009.

[4] Brian M. Riedl, “New Budget Estimates Show Unsustainable Spending and Debt,” WebMemo, No. 2595, The Heritage Foundation, August 25, 2009.

[5] Ibid.

[6] Taylor.

[7] Ibid.

[8] Ibid.

[9] Riedl, “New Budget Estimates Show Unsustainable Spending and Debt.”

[10] Andrew W. Mellon, Taxation: The People’s Business, New York: The Macmillan Company, 1924, p. 25.

[11] Ibid., p. 46.

[12] Warren G. Harding, “Special Address to Congress,” Presidential Papers of Warren G. Harding, April 12, 1921.

[13] Pete V. Domenici, “Looking behind the curtain,” The Washington Times, September 4, 2009.