Politics & Policy

Put Government On a Diet

Pass the Bush tax cut.

One of the great, hidden values of President Bush’s $600 billion tax cut, is that it could be the best (if not the only) way to end the boisterous spending spree on Capitol Hill of recent years. In the fiscal year just ended federal spending was up by $150 billion. The one year increase was larger than the entire federal budget in 1965.

If anything can slow down the appropriations — and, alas, maybe there is nothing — it’s a tax cut that prevents the drunken sailors in Washington from spending. This is one reason why the GOP deficit hawks, who are haggling over the “cost” of the Bush tax cut and fretting over its impact on the deficit, are so misguided.

History proves that tax revenues create spending and the lack of revenues help restrain spending. Richard Vedder of Ohio University has documented time and again that revenues create the political incentive and the financial means to spend. He has shown that every additional dollar of tax revenue collections incites more than $1 in additional spending pressures. Message: Control the revenue intake and you will restrain the out-flow.

Milton Friedman, the Nobel prize-winning economist agrees. Friedman has often noted, and I paraphrase: Governments spend whatever they receive in taxes and whatever else they can get away with. That is an historical lesson that Republican tax-cut skeptics like Senators Kit Bond, John McCain, George Voinovich, and Mike DeWine need to learn.

The emergence of the budget deficit is almost all a result of egregious overspending. To quote Ronald Reagan: “Government isn’t the solution to our problems, government is the problem.” When he said that the federal budget was $500 billion. Today it’s $2 trillion.

This is the third straight year when the federal government’s budget has outpaced private-sector expansion. In 2001, total government outlays at the city, state, and federal levels grew by 6%. The private sector shrank by 0.1%. From an economic-recovery standpoint, this could hardly be worse news. Real wealth creation is driven by private businesses, entrepreneurs, and investors — not by putting to work more government bureaucrats. Government spending rose more last year than all the spending of the venture-capital sector — the sector that creates the industries of the future.

What’s wrong with this picture? We are systematically pick-pocketing business owners, entrepreneurs, venture capitalists, and investors, and allowing those funds to be spent by Congress and government agencies instead. From an economic-efficiency standpoint, this makes about as much sense as having Britney Spears pinch hit for Barry Bonds.

We are foolishly following in the Keynesian footsteps of Argentina and Japan — two of the nations with the biggest bloat of government in recent years. Government didn’t stimulate those economies, it further plunged them from recession to depression. In turn, trillions of dollars of wealth have been destroyed.

Another tutorial from Milton Friedman: “There ain’t no such thing as a free lunch.” The real resources in the economy captured by government for additional public-sector spending can only come from three sources: taxes, debt, or inflation. The build up of any one of these funding sources can have influenza-virus effects on a capitalist economy. In the 1970s all three accelerated at once, and the U.S. industrial economy collapsed until Ronald Reagan’s supply-side and limited-government ideas came along.

The cast of characters in Washington who pout that tax cuts are fiscally irresponsible are the same ones who recently voted for the most expensive education spending bill ever and the most expensive farm welfare bill ever. This year Congress will pass the most expensive foreign aid bill ever. It also wants to pass the costliest new entitlement program — taxpayer financed prescription-drug benefits for seniors, with a potential price tag of $600 billion over ten years — since LBJ created Medicare 35 years ago.

Congress, of course, only seems concerned about the budget deficit when there are pro-growth tax cuts at hand.

The Tom Daschle Democrats have announced a blunderous economic-stimulus plan that would add another $30 billion to $50 billion in federal spending this year. That spending will de-stimulate the economy by capturing even more resources from private businesses and workers. Tax cuts grow the economy; government spending grows the government.

By recommending a formidable tax cut, President Bush now understands what so few others in Washington are capable of grasping: The burgeoning federal budget and the ever rising tax burden in America have become the greatest threats to a sustained recovery, a stock market revival, and a return to the virtuous free-market induced prosperity of the 1980s and ’90s.

In the ’80s, when Reagan used the same tactics that Bush is now using by enacting a large pro-growth tax cut, the budget briefly fell shortly thereafter. Reagan’s critics derisively described the Reaganomics agenda of fiscal control as “starve the beast.” Republicans should pass the Bush tax cut and try this policy again. Nothing else seems to slow down the profligate drunken sailors up on Capitol Hill.

— Stephen Moore is president of the Club for Growth.


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