It's federal budget proposal time again, so brace yourself for yet another round of disinformation. Amidst great wailing and gnashing of teeth from assorted interest groups, Council of Economic Advisers Chairman Martin Feldstein assures us that federal nondefense spending has been slashed to its political limit. Up and down the land, the voices of responsibility argue that only a major tax increase can save this country from a decade of destructive deficits.
What is a thinking person to make of all this? First, as both Democrats and Milton Friedman are taking pains to remind us, unending deficits are bad for us. When the federal government consistently spends more than it takes in in taxes, there are only two ways to cover the difference: sell bonds or inflate the money supply ("monetize" the deficit). Government bonds represent a claim against future taxpayers, many of them not even born yet and certainly not consenting parties to today's spending decisions. In addition, they impose two large present costs. First, the interest payments for this year alone are about $100 billion—that's more than half of this year's deficit. And the more capital soaked up by the government, the less there is available for individuals and businesses to invest in new homes, machinery, etc. Moreover, if there's anything we've learned from the inflation of the 1970s, it's that monetizing the deficit is no solution. The hidden tax of inflation is incredibly destructive of the economy and of individuals' lives.
Supply-side economists like Paul Craig Roberts have been pointing out that projections of an endless stream of $200-billion annual deficits are unrealistic. Such projections have already had to be revised downward several times as the economy has roared back to life during the past year. No matter how you look at them many of the numbers for the decade ahead are genuinely frightening.
Advocates of tax increases argue that it was the Reagan administration's cuts in tax rates that have "caused" the deficits. Only the most tortured interpretation of the data can lead to that conclusion. In point of fact, when measured as a percentage of gross national product (GNP), federal tax receipts have remained within a narrow band of 19 to 20 percent from 1970 through 1983. That itself was a significant increase from the 17 to 18.5 percent range of the 1950s and '60s. In those earlier decades, federal spending remained very close to federal revenues, but in the 1970s spending began growing faster than revenues, averaging 21 percent of GNP for the decade. And then it began exploding, to 22.9 percent in 1980, 23.5 in 1981, 24.4 in 1982, and an estimated 25.6 percent in 1983. In other words, Reagan's modest tax-rate cuts held the tax burden to a more-or-less constant share of GNP—while federal spending soared. In fact, federal outlays increased 53 percent between 1980 and 1983.
But the real crunch is yet to come. The reason federal revenues more or less kept pace with federal spending during the 1970's was bracket creep, the insidious process whereby inflation drove people into ever-higher tax brackets without Congress having to legislate a tax increase. That permitted Congress to create and expand numerous "entitlement" programs—programs that automatically provide payments to people meeting certain criteria, without requiring further action each year by Congress. Today nearly 55 percent of the federal budget—some $454 billion, according to the Grace Commission—goes to various transfer programs, most of them on an entitlement basis. Even after inflation, these programs have grown by 120 percent since 1970, going from 7 percent of GNP to 13 percent today. If expenditures on these programs continued at their average rate of growth from 1976 to 1983 (11.6 percent a year), they would cost $1.1 trillion in 1990 and $6 trillion by the year 2000.
The out-of-control nature of entitlement programs even has prominent Democrats alarmed. The New Republic's December 31 cover story featured contributions by Michael Kinsley, Daniel Moynihan, and Bruce Babbitt all acknowledging that spending on such programs is out of control and must be cut back. They also pointed out, correctly, that most of Reagan's spending cuts have been focused on the relatively small set of domestic spending programs that actually aid the poor—programs with means tests. Virtually untouched have been the really big-ticket entitlements—Social Security ($17 billion), Medicare ($42 billion), and farm subsidies ($19 billion)—which aid mostly the middle class.
So when Martin Feldstein says that the limit of domestic spending cutbacks has been reached, what he really means is that the administration hasn't the courage to take on the organized interest groups that benefit at the expense of the general taxpayer. It means Feldstein and Reagan accept as untouchable such sacred cows as:
• A $15-billion Synthetic Fuels Corporation that hands out subsidies to companies that will produce $67-a-barrel oil;
• The $21-billion Payment in Kind program that gave, for example, Arizona farmers an average of $69,200 last year;
• Nearly $7 billion for grants and loans to middle-class college students (including medical students, in spite of a widely proclaimed doctor surplus);
• A $5-billion program of "revenue sharing" to cities (what revenue? one might rightfully ask);
• An $8.4-billion bailout of the big banks via the International Monetary Fund.
And on and on and on. Space does not permit a discussion of the boondoggles on the defense side of the budget: buying weapons systems that don't work, mostly to defend allies that can certainly afford to pay for their own defense rather than soaking US taxpayers to the tune of $100 billion a year.
No, we are not "undertaxed," as George Will and other statists would have it. We are simply being spent into bankruptcy by politicians who've forgotten that it's our money they are handing out. Fortunately, the American people are way ahead of their leaders on this issue. A December Gallup poll showed overwhelming support for reducing the deficit by cutting spending (70 percent) rather than by raising taxes (16 percent). It's high time the politicians, and their apologists in academia and the media, got the message.