The Great Hemorrhage – Feb. 23, 2010

I saw a chart the other day that was absolutely shocking.  It showed the growth of US Federal spending since 1970, and plotted alongside is the growth of median US incomes over the same time period.  Both lines are inflation-adjusted, meaning the 1970 figures are directly comparable to the 2010 figures.  Both lines move steadily upward from left to right – except that the spending line rises 250% over that forty years while the income line rises about 35%.  That’s right.  Government spending relative to the median income of its taxpayers is now nearly seven times higher than it was in the Vietnam era.

 

And that is before the real spending kicks in: in the next ten years, the Baby Boom generation starts to retire en mass, and they will be pushing up government spending for Medicare and Social Security by hundreds of billions.

 

Another look at the chart (I wish I could reproduce it here but I can’t find it) shows how little it mattered who was running the government – Republican or Democrat in the White House, control of Congress or split party, it made little difference – the spending line rises inexorably.

 

Clearly this is unsustainable, and it is what has really animated the Tea Party movement.  They are not Republican, certainly not Democrats.  They are “just plain folks” who have been seething at the fire hose of spending that no one in Washington can seem to control, and when the Obama administration turned it up another notch they rose up in protest.  And well they should.  This government does not seem to be more than tangentially concerned with the growth of spending – au contraire, they are seeking to pile on another trillion dollars in spending on a health care program that taxpayers don’t want.

 

I’ve said it dozens of times, but it bears repeating: when politicians are spending the taxpayers’ money, there is a one-way ratchet effect.  This year’s spending becomes the baseline from which next year’s spending rises, and there is no such thing as a reduction in spending.  Indeed, whenever there is a bold effort to rein in spending, all that is really achieved is a slowing down in the rate of growth.  There are plenty of constituencies for more spending – there is literally no end to the queue of needy supplicants who could use a handout from the government till.  On the other hand, until there is a popular revolt like the Tea Parties, there is next to no constituency for spending restraint, because spending directly benefits the recipient but only indirectly harms the injured party – the economy, and by extension the opportunity it provides.

 

And yet, the harm of overweening government spending is undeniable, and is documented repeatedly in economic literature.  There is a direct correlation between unemployment and the level of government spending relative to the wider economy.  The bigger the government, the more people out of work (look at Europe).  An analysis in today’s WSJ makes it clear: the Obama administration’s “stimulus” package will have spent about $600 billion over 2009 – 2010; but the negative effects of government spending and the taxes needed to pay for it mean that over a full five-year cycle, through 2013, private sector spending will decline by $900 billion.  In other words, every dollar spent to “save or create jobs” last year and this will cost $1.50 of purchasing power by individuals and companies over the next three years.  How is that a good deal?  (This analysis, by the way, uses economic assumptions on the “multiplier effect” of spending and taxes that were developed by Christine Roemer – Obama’s own chief economist!)

 

And the spending hemorrhage goes on at all levels of government.  One classic governing ploy is to buy labor peace among government employees unions by offering them not just job security but generous benefits, like early retirement on substantial pensions.  But these benefits are rarely if ever fully funded; governments leave it for future occupants of the offices to come up with the money to pay for these retirements when the time comes.  Usually, these assets are invested in stock markets, and there is a pro-cyclical effect: just when economic hard times hit, and government coffers are low due to reduced tax receipts, that’s when these benefit plans become more underfunded because they suffer losses in the stock portfolios.  That means that just when governments can least afford it, they need to put up more money to fund their benefit plans.

 

Another common ploy is to expand benefits they can’t afford.  One classic example is Medicaid – the Federal government has steadily expanded eligibility for Medicaid, which was originally intended as a safety net for the most indigent and now has become just one more tool of income redistribution.  The “stimulus” bill expanded the eligibility yet further, as did repeated increases in eligibility for the Schip program (health care for the children – who can be against that?).  While it’s great that the government takes care of more people who can’t make it on their own, the fact is that somebody has to pay for it – and these escalating costs are one of the big factors in bringing state government finances (which foot a big portion of the tab) to disastrous straits.  Avoiding the next hike in those obligations for his state was the rationale behind Ben Nelson’s Cornhusker Kickback: the Feds agreed to pick up Nebraska’s share if he would vote for Obamacare.

 

Don’t forget the finagling of accounts to make the problem seem less grievous than it really is.  Remember I said back in the early days of our conversations that if private companies accounted for their future obligations the way the US government accounts for Medicare and Social Security, their managers would go to jail.  We have liabilities in the TRILLIONS for which not a dime has been put away.  Remember Al Gore’s famous Social Security lockbox?  It’s stuffed with IOUs.  Sometime in the next seven years, the money coming in from payroll taxes will start to be be less than the benefits paid out, and the Social Security system will ask the US Treasury to fill the gap. But hold on a moment! the Treasury for decades has been using the excess revenue as part of its regular funding, so now it not only has to fund the Social Security payments out of regular tax receipts but it also has to find a replacement for the funding it used to get from the excess payroll taxes.

 

And government accounting is so 18th Century that this hasn’t become the scandal that it should be – even though everybody sees it coming.  So we waste our outrage on our public figures’ sexual peccadilloes or unguarded comments.

 

Here’s the problem with the bloated public sector: when the economy is growing smartly, it is easy to rationalize spending more on government programs – the tax money is flowing, and everybody’s happy.  But when dire times hit, governments have to spend MORE, not less (more for unemployment benefits, more to provide Medicare to an expanded pool of needy, more to shore up pension plans, more for everything).  Then, when good times return, the government goes back to spending more, because the tax money has begun to flow again.

 

The beast simply does not grow smaller.  Ever.

 

It has swollen to the point of bursting.  We are not in as bad a shape as Greece or Italy, but the numbers are vastly larger.  Unless we elect leaders who will do something about this, our country is bound for penury.

 

 

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