January 2010

Tax and Spend…Tax and Spend…Borrow and Spend

By Doug Stout

For decades the liberal mantra has been to “tax and spend;” and for decades conservatives have decried this approach as unproductive, unwise, and burdensome to a free-market economy, all of which has always been accurate. However, there is at least one thing worse than pursuing a continual government policy of “tax and spend” and that new approach is the real tragedy leading to the demise of our current economic system.  People who believe that government exists to “give them things” they would like to have, apparently by “granting them wishes” and having those things appear, have discovered an new easier approach to get what they want.

Since there are occasionally voters who tend to object to the government taking their hard-earned wages from them in the form of taxes, but there unfortunately seem to be very few voters who actually stand-up and object to getting free things from the government; politicians have devised a plan to accomplish both seemingly contradictory objectives at the same time.  Actually, the approach is not remotely new, but there is an essential element that is now missing from those past similar approaches.

Those who believe in big government have often taken the tack of “buy now and pay later.” They even usually managed to “keep a straight face” while saying the words, but now they no longer even bother to mention the “pay later” part of the equation.  Because we now all know, that the “pay later” part never actually happens.  So now, that critical aspect is just pushed aside. It is obscured by such self-serving rhetoric as “we can’t afford NOT to spend the money,” which by implication suggests that the genie is always able to grant us more money to spend, or that the pot of gold at the end of the rainbow is an endless source of treasure.

As we well know, the leprechaun holding that pot of gold is none other than us…or as we dig the hole ever deeper, it is our children who hold the increasingly impossible burden of refilling the magic pot. It is one thing to be signing IOU’s with our children’s names in the position of the payer, if we were giving the IOU’s to people who have our best interest in mind.  However, that is not the case.  We are often signing those IOU’s over to international loan sharks, who at some point are going to want their money back and are not likely to take “no” for an answer.  Much of the debt we continue to finance, at ever increasing rates under the Administration of President Obama, is being bought up by foreign nations, most prominently mainland China.  While I do not think the People’s Republic of China is necessarily destined to be our “enemy,” it does seem likely that they are destined to be our economic “competitor” over the next several decades.

When the stakes of the game involve economic survival, world influence, and the relative standard of living for citizens in both countries, those types of competitions have the potential to be intense and protracted. Throughout world history they have tended to end with a “winner” and a “loser” and they have also usually, although not always, involved violent conflict at some point of the competition.  While we all hope this does not come to pass, it is unwise to give our competitor the advantage of “holding the purse strings,” of our economic viability.

But let us assume for the sake of our current discussion that the Chinese communist government does have our best interest at heart. This is a plausible scenario, not just out of the goodness of their heart, but it may very well be in their best interest to have a vibrant United States economy, which allows us to pay the Chinese interest on the Treasury Bonds they have invested in…and also to continue to supply a lucrative consumer market for the economic goods produced through their own economic growth. Does that mean our problems are more manageable? Not really; under our current policy of ballooning our national debt, we are devaluing our economy.  This means we are devaluing our Treasury Bonds and it may mean that soon they will not be seen by the world as a sound investment.  If this occurs, our “credit” dries up.  As an analogy, we all know what happened when the “credit” dried up suddenly in the United States housing market.

Just how badly are things getting out of control? Consider these comments from an editorial to the Wall Street Journal on November 20, 2009. The authors are Congressmen Jeb Hensarling and Paul Ryan, widely regarded as two of the economic “rising stars” in the conservative movement:

Total nondefense spending set an all-time record this year—20.2% of GDP—double federal spending as a percentage of GDP during the height of the New Deal in 1934. Even without this year’s stimulus bill and last year’s bailout of the financial system, nondefense discretionary spending authority still grew by 10.1% in fiscal year 2009 and is projected to rise by another 12% in fiscal year 2010. Forty-three cents of every dollar of this spending is borrowed money. [1]

Given the magnitude of federal borrowing, there is good reason to expect higher interest rates and strong inflationary pressures in the future. It is hardly surprising that many investors are reaching the conclusion that this administration and Congress favor policies that virtually guarantee the economy will not return to the climate of low interest rates, benign inflation and strong growth that we knew from 1982-2007.[2]

Perhaps more than ever in our nation’s history we are risking the very financial viability and the foundation of our standard of living for the future.  The key to sustainable growth and prosperity are “limited government” and “low taxation.”  We may believe that our current tax rates are too high, but it is not possible to have “bloated government” and not have “bloated taxation.”  We currently have both; the public is just being deceived, because much of that tax burden has been deferred.  When the payments “come due” what becomes of our nation if our only option is default???

Doug Stout is a Research Analyst at the Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of the Public Interest Institute or the Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

1 Jeb Hensarling and Paul Ryan, “Why No One Expects a Strong Recovery,” The Wall Street Journal, November 20, 2009, http://online.wsj.com/article/SB20001424052748704431804574537490451978558.html,  (November 20, 2009).

2 Ibid.