Why Higher Taxes Can't Trim the Deficiency
Huge federal-government deficits that are financed by borrowing lead to high interest rates and a strong dollar, thus depressing investment and economic growth, right? And if we just raise taxes to cover those deficits-thus keeping the government from competing for borrowed money and consequently driving up interest rates-then everything will be okay, right? That's what big-spending, big-taxing folks in politics are saying these days. But a recently released US Treasury Department study, three years in the making, shows that what really dampens private-sector activity is government spending, no matter how it's financed.
Paul Craig Roberts, a former policy advisor in the Reagan administration, devoted a recent Business Week column to pointing out the significance of the Treasury study. "The study," Roberts reported, "finds that government spending crowds out the private sector regardless of whether the spending is covered by taxing or borrowing." And the conclusion, he noted, is "that the only certain way to curtail crowding out is to curtail government spending." Indeed, the evidence indicates that "the depressing effects of higher taxes on economic growth would widen the deficit" instead of improving the situation.
Roberts also cited another recent study, by University of Chicago economist Roger Kormendi, that supports the Treasury study's conclusions. Published in the December issue of the prestigious American Economic Review, Kormendi's study "finds that government spending and transfer payments result in lower private spending and reduced economic growth," Roberts reported. So "to respond to a budget deficit by raising taxes," Roberts observed, "does nothing to reduce the real problem-the spending itself-but does reduce private savings further."
The significance of the point Roberts and others are trying to convey will surely be lost on-or ignored by-a good number of our public servants. But at least the data are out there and being talked about-and eventually, perhaps, will be reckoned with.
Spelling Relief Privately
It's no secret that many government foreign-aid programs for the Third World do more harm than good. The aid ordinarily comes with political strings attached, it is frequently diverted to repressive local elites, and it is often ill adapted to the recipient nation's culture and economy. It's no wonder that even left-oriented analysts such as Frances Moore Lappe have added their voices to those of such free-market analysts as P. T. Bauer in calling for an end to foreign aid flowing from Western governments to less-developed countries.
But there is an alternative that has been able to avoid the pitfalls of government aid-private foreign-aid organizations. According to a recent New York Times article, there are currently at least 500 nonprofit organizations involved in development assistance for other countries. Because they are relatively free of government constraints, these private voluntary organizations, or PVOs, can be innovative in ways that government programs can't-and they can do it with far less money.
One such PVO described by the Times is Partners of the Americas. Created by the government in 1964 but switched to the private sector in 1970, it fosters partnerships between citizen groups in 46 states in the United States and 28 Latin American and Caribbean countries.
For example, the Utah-Bolivia partnership has built 117 village schools in an Andean plateau, thanks to the labor of Bolivian villagers and a fundraising campaign by fifth-and sixth-graders in Utah. The Vermont-Honduras partnership is teaching 15 Honduran subsistence farmers about contouring, crop rotation, organic fertilizers, and other simple technologies, with each of the Honduran farmers promising to teach the techniques to four neighbors. And the Wisconsin-Nicaragua partnership is sending medical supplies to Nicaragua and sponsoring a food-preservation project that uses low-cost solar dryers.
All told, Partners of the Americas is sponsoring some 1,300 projects annually. In contrast to the lavish appropriations distributed by government bureaucracies, most of the Partners projects operate on grants of $5,000 or less.
PVOs are often able to work in areas where the US government is not welcome. Joseph Curtin of Catholic Relief Services, which operates in Lebanon, told the Times: "As a foreign private organization, Catholic Relief Services can be completely neutral, serving everyone, both Christians and Moslems, and accepted by all. Furthermore, we can provide an American face other than that of the U.S. military and political presence."
In some respects, however, the relationship between PVOs and the government has become uncomfortably close. Because of the PVOs' successes in getting assistance to people who need it most, Congress has in effect contracted out foreign-aid programs for nations such as Haiti and Zaire, channeling aid funds through PVOs. And 1983 reports indicate that 167 PVOs registered with the government's Agency for International Development (AID) were receiving $731 million worth of government support, compared to a little over $1 billion in private contributions.
With extensive reliance on government money, the PVOs face the danger of becoming an appendage of the government's foreign-aid establishment. But so far, the private organizations have an impressive record of independence and accomplishment. Moreover, they provide a valuable lesson in the advantages of voluntary over government-run charity.