$590,000 in 30 seconds

[MORTARDUDE]

Libertarian Solutions: How to solve the United States' $6,736,489,356,420 problem
by Bill Winter
LP News Editor


EDITOR'S NOTE:
How can Libertarianism solve America's problems? Each issue, LP News showcases how "Libertarian Solutions" -- or interim steps in a libertarian direction -- can help improve our nation.



If you had visited the online National Debt Clock at 12:00 noon on August 1, you would have seen this figure: $6,736,489,356,420.66.

That's the amount of money owed by the federal government. (Over $6.7 trillion dollars.)

But if you visited it again just 30 seconds later, you would have seen a different, bigger number: $6,736,489,954,145.59.

That's an increase of about $590,000 -- a half-million dollars -- in 30 seconds.

It's a stark reminder of just how quickly the politicians in Washington, DC are plunging this nation further into debt.

The more time that passes, the scarier that number gets.

If you visited the Debt Clock (at www.brillig.com/debt_clock/) one minute later, the number would have been $1.2 million larger. An hour later, it would have grown by $70 million. A day later, it would have swelled by $1.68 billion.

Over the course of the year, the numbers add up to about $613 billion in additional debt owed by the government.

Yes, the national debt is back. And so are deficits.

Before we go on, let's define our terms: The deficit is the amount of overspending politicians do in one year. In 2003, for example, the federal government will take in $1.75 trillion in tax revenue, and spend $2.21 trillion. The difference -- $455 billion -- is this year's "official" deficit. (We'll examine later why that number is different from the $613 billion mentioned above.)

The national debt, by contrast, is the sum of all the yearly deficits (minus whatever the Feds have paid off). The current number shown on the National Debt Clock -- $6.7 trillion -- is the result of decades of overspending.

As a political issue, deficits dropped off the public radar in the late 1990s. Thanks to a surge in tax revenues and modest fiscal restraint -- prompted by tension between Democratic President Bill Clinton and a Republican-controlled Congress -- the federal government technically "balanced" the budget for four years. (They didn't really balance it, as we'll see in a moment.)

All that changed in mid-July, when the Bush Administration announced that this year's federal deficit will be $455 billion. In raw dollars, it's the government's largest-ever deficit, and it catapulted deficits back into the headlines.

Let's look at that discrepancy now: If the deficit is $455 billion, why does the National Debt Clock say it's $613 billion? Because $613 billion is the real deficit; $455 billion is the phony deficit.

Thanks to arcane accounting policies, the federal government counts Social Security Trust Fund surpluses as an asset, which reduces (on paper) the size of the deficit.

This year, Social Security will take in $160 billion more than it will pay out. That money -- supposedly deposited into the Trust Fund -- is counted against the real $613 billion deficit, lowering it to $455 billion.

The only problem: It's not true. Social Security Trust Funds are immediately spent on general government programs. The government just deposits IOUs (Treasury bonds, which it owes itself) in the Trust Fund. It then counts those IOUs as an asset.

That's like your right hand lending your left hand $10, spending it, and then counting that $10 as an "asset" you owe yourself.

Don't believe that the government could get away with such blatant deception? The proof is in the numbers. In both 1998 and 1999, politicians claimed there was a budget "surplus." Yet, the federal debt increased $120 billion in 1998 and another $162 billion in 1999.

Bottom line: Alleged surplus or acknowledged deficit, the national debt gets larger every year.

So why is deficit spending bad? Here's why:

1) Deficits increase the cost of government.

When the government spends more than it takes in, it sells U.S. Treasury bonds to cover the difference. To get people to buy them, it has to pay interest on those bonds (anywhere from 2% and 12%, depending on when they were issued). With a $6.7 trillion debt, interest payments add up in a big way.

In the fiscal 2003 budget, the Bush Administration allocated $181 billion for interest on the debt. But with the deficit ballooning, interest payments are ballooning, too -- to almost $1 billion a day, according to U.S. House Rep. Gene Taylor (D-MS).

"In the first nine months of fiscal year 2003, the Treasury spent $278 billion on interest on the debt," he said. That makes interest payments the federal government's third-largest expense, trailing only Social Security and military spending.

In other words, about 20% of every tax dollar goes to pay interest on money borrowed by politicians 10, 20, and 30 years ago.

2) It crowds out private borrowing, which can cripple business growth and hurt the economy.

As Benjamin M. Friedman, a professor of economics at Harvard University, wrote in the Boston Globe (July 27, 2003): "What's wrong with continual large budget deficits ... is that they take away the economy's means of achieving economic growth.

"When the government spends more than it takes in from taxes, the Treasury has to borrow in the financial markets to cover the overage," he wrote. "This borrowing absorbs some of the saving done by families and firms, saving that otherwise would have remained available to finance investment in productive new plants and equipment."

It's happened before, noted Friedman. During the country's last huge deficit spike, in the 1980s under President Ronald Reagan, "the share of U.S. national income devoted to net new investment in plants and equipment fell to the lowest average level in the postwar period, and real wages -- and therefore the income of the typical U.S. family -- stagnated."

3) It means less money for you and your family.

More federal spending means less money for you to buy what you want, noted the Future of Freedom Foundation's Richard M. Ebeling (January 17, 2003). That's true whether government spending is paid for in today's dollars (via taxes) or tomorrow's dollars (via borrowing).

For example, wrote Ebeling, Bush's $455 billion deficit will cost more that the combined total of all the furniture and household items bought by Americans this year ($319.2 billion), or clothing and shoes ($321 billion), or single-family residential housing ($245.3 billion).

"In other words, these are the kinds of things that Americans will have less of when their dollar equivalents are borrowed away by the federal government to cover the expected budget deficits," he wrote.

4) It makes future generations pay for current spending.

When the government runs a deficit, it is "essentially taking money from one generation and giving it to another," said Creighton University economics professor Ernie Goss in the Salt Lake Tribune (July 20, 2003).

That's because the government has to eventually pay off the money it owes. For example, this year, the Treasury paid off the last of the 30-year bonds it used to finance the final year of the Vietnam War -- in 1973. So, today's young taxpayers are paying for the mistakes of Richard Nixon, just as tomorrow's taxpayers will pay for the mistakes of George W. Bush.

The immorality of deficit spending prompted Thomas Jefferson to write in 1791: "We should consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves."

Jefferson understood that a big-spending government is bad. But a big-spending government that pushes the costs onto the nation's children and grandchildren is even worse.

Given the damage caused by deficits, here's what we should do to start restoring the government to fiscal health:

1) Cut government spending

The "cure" for a deficit is not much different than the cure for obesity, which is: Eat less and exercise more. Translated into fiscal policy, that means: Spend less and exercise more self-restraint.

Politicians don't agree. Republicans say the deficit is caused by a dip in tax revenues and the cost of fighting terrorism. Democrats say the deficit is caused by President Bush's modest tax cuts.

However, in their more honest moments, even the politicians admit the real cause.

"These are spending-driven deficits," U.S. Rep. Jim Nussle (R-IA). chairman of the House Budget Committee, told Fox News on July 16, 2003.

The evidence is clear, reported Bloomberg News columnist Caroline Baum on July 22, 2003.

"The dirty little secret that neither party wants to talk about is that President George W. Bush is a big spender," she wrote. "Stripping out the increase in national defense outlays, discretionary spending rose 12.3% in fiscal 2002 and will rise 12.6% in 2003."

Adding in his 2001 spending, Bush has increased non-defense discretionary spending by 20.8% (adjusted for inflation), noted Baum. That's more than the full four-year term of Jimmy Carter (up 13.8%) or the second term of Bill Clinton (up 8.2%).

Bush has apparently never met a spending bill he didn't like: He has yet to veto a single spending bill. (By contrast, Ronald Reagan vetoed 22 bills during his first three years in office.)

If politicians need suggestions about what to cut, they could look at the Cato Handbook for Congress, which lists dozens of programs that are ripe for the budget ax.

The government could move the budget solidly back into surplus territory, notes Cato, by moving Social Security toward a system of individual savings accounts; by privatizing all government-operated businesses, such as Amtrak and the U.S. Postal Service; and by selling excess federal land and buildings.

Then, to keep the pressure on, the government should "establish a 'sunset' commission to automatically review all federal programs on a rotating basis and propose major reforms and terminations," recommends the Cato Handbook.

2) Don't raise taxes.

As the Cato Institute's Veronique de Rugy wrote (March 24, 2003), raising taxes was tried as a method of combatting deficits during the Great Depression, and it failed.

Faced with a growing deficit, presidents Herbert Hoover and Franklin Roosevelt boosted the top income tax rate from 25% to 79%, and corporate taxes from 12% to 25%. They also imposed a new dividends tax, a liquor tax, and a Social Security payroll tax.

The result: The deficit jumped from $2.2 billion in 1932 to $2.9 billion in 1940, wrote de Rugy.

"A key problem in trying to balance the budget with tax increases is that higher taxes fuel more [government] spending," she wrote. "[Also], the hikes contract the tax base by reducing economic growth and spurring greater tax avoidance. As a result, the government gains only a fraction of the revenues it hopes to receive."

For those reasons, de Rugy piquantly noted, "raising taxes to balance a budget is like drinking a six-pack to cure a hangover."

3) Pass a strict balanced-budget Constitutional amendment.

Congress should take a cue from the LP Platform, which gives a prescription for such an amendment.

The LP Platform supports "the drive for a constitutional amendment requiring the national government to balance its budget." To be effective, the Platform says, the amendment should provide:

* That neither Congress nor the president be permitted to override this requirement.

* That all off-budget items are included in the budget.

* That the budget is balanced exclusively by cutting expenditures, and not by raising taxes.

* That no exception be made for periods of national emergency.

Of course, the drawback of a Constitutional amendment is that politicians may simply find ways to evade it, no matter what restrictions are written into it.

Cheating is something politicians are good at. Over the past decade, to evade self-imposed spending caps, Washington, DC politicians pioneered a number of innovative bookkeeping techniques that would have landed them in jail had they worked for a private company.

For example, they slipped the cost of the 2000 Census into an off-budget "emergency spending" bill. (The Census was hardly an emergency or a surprise: It's been conducted once a decade since 1790.)

Politicians also moved spending to the first day of a new fiscal year (rather than the last day of the old year), and lowered estimated expenditures by predicting cost savings through Al Gore-style "Reinventing Government" initiatives. (Not surprisingly, most such cost savings never materialized.)

So, yes, politicians will cheat. But if a balanced budget amendment makes it more difficult for them to spend this nation into bankruptcy, it's worth doing.

Conclusion

In a way, the deficit is the byproduct of a politically schizophrenic American public that is anti-tax but pro-spending.

In other words, most Americans don't want their federal taxes to go up, but they do want to keep receiving federal checks for Medicare, Social Security, college loans, farm subsidies, and so on.

Politicians, eager to please, promise more government programs and benefits, while vowing not to raise taxes. They plunge the government into debt so they can keep handing out goodies.

One example: The $400 billion prescription drug benefit President Bush has promised seniors will be paid for with deficit spending. Although Grandma and Grandpa may not admit it (even to themselves), this means their children and grandchildren will be forced to pick up the tab for their high blood-pressure medication.

That almost irresistible temptation to spend today -- and let someone else pay tomorrow -- may be why Thomas Jefferson once wrote that public debt is "the greatest of dangers to be feared."

Of course, it's not the only danger big government poses. That's why Libertarians want a federal government that is much, much smaller than it is today.

Merely balancing the budget won't accomplish that; a budget balanced at $2.2 trillion would be no victory. However, it would be better than what we have now.

A balanced budget would, at the very least, herald a return to fiscal honesty, would stop boosting the cost of government with exorbitant interest payments, and would stop shifting the cost of today's spending onto tomorrow's taxpayers.

For all those reasons, a balanced budget could be the beginning -- but not the end -- of more fundamental Libertarian efforts to genuinely reduce the cost of government.

[BLUEHAWK]

Larry -
Interesting...
Sounds very much like the sort of books cooking that Enron did.

- In the case of a national budget, however, wouldn't it be true that at some point, given the unstoppable eagerness (of both political parties) to use military force throughout the world, the magnitude of interest on treasury debt would preclude selling of additional notes?

- Also, if excess public lands were to be sold into private hands, wouldn't that eliminate a kind of unreclaimable savings account against total disaster?

- What will be the effect (which I fully expect to happen sooner or later) of foreign depositors withdrawing their funds from american financial institutions, thus reducing the capital with which american businesses operate to leverage large-scale infrastructure projects?

- What would be the effect of making it unlawful for a corporation to receive special tax forgivenesses in return for locating/relocating major parts of their headquarters/factory systems in a given place?

- Wouldn't it also be wise to begin taxing the property of churches and other non-profit organizations whose annual budgets exceed a certain threshhold, on a needs/means-tested basis?

Mike