Politics & Policy

True Fiscal Discipline

Congressional critics need a few lessons in economic reality.

With the return of the federal budget deficit, “fiscal discipline” has become a wildly popular catchphrase in Washington, D.C. But don’t confuse this rhetorical enthusiasm for genuine support. Sadly, the common-sense notion of fiscal discipline — being frugal and watching what you spend — is gradually being hijacked and redefined to justify decidedly un-disciplined fiscal policies.

Even now, as the economy struggles to regain its footing, the false prophets of fiscal discipline denounce the tax relief recently passed by Congress as an act of fiscal recklessness. Yes, the economy could use the boost, but how is the government to “pay for” the tax cut?

These critics are in dire need of a few lessons in economic reality.

Lesson 1. It is impossible to “pay for” a tax cut. Taxation is merely one method the government uses to extract resources from the private sector for its own use. A tax cut changes the mix of how the government extracts resources from the private sector — a little less taxing, a little more borrowing. While the method of extraction is important, it is generally less important than the fact that it is the government, and not the private sector, that is consuming those resources.

Lesson 2. Restraining spending growth is an act of fiscal discipline; raising taxes is akin to buying larger pants in lieu of exercise and a low-calorie diet. While government is responsible for providing a finite set of essential services, the temptation for government spending to grow infinitely in size and scope is ever-present. True fiscal discipline requires elected officials to keep spending under control to minimize the drain of resources from the private sector to the public sector.

Lesson 3. The federal budget deficit is not the best measure of the government’s fiscal restraint … or lack thereof. A better measure is the sum of federal, state, and local government spending as a share of GDP, regardless of how that spending is financed. This measure — let’s call it the Fiscal Misery Index — nearly doubled from 16.5 percent of GDP in fiscal year 1948 to 32.5 percent of GDP in 1983.

With the end of the Cold War and the subsequent reduction in defense spending and net interest payments, government’s share gradually fell to 28 percent of GDP before rebounding somewhat in the aftermath of the recession and the terrorist attacks. If the era of “Big Government” is over, the data have yet to confirm it. It may be more accurate to say we have entered the “Era of Slightly-Smaller-Than-Before Government.”

Admittedly, the Fiscal Misery Index reflects only half of the equation; it does not reflect the immense good that government does. But then, how much a government spends is not a reliable indicator of how well it performs its essential functions. To paraphrase former Treasury Secretary George Humphrey, it’s a terribly hard job to spend $3 trillion and get your money’s worth.

The Bottom Line. If policymakers are truly committed to fiscal discipline, they will redouble their efforts to restrain the size and scope of government. In other words, they will follow President Bush’s example. Each of the Bush administration’s budget submissions to Congress has stressed the president’s commitment to restraining the overall growth-rate of federal spending while fully funding national priorities such as education and national defense. Despite the recession, the on-going war on terror, and the myriad other pressures for increased spending, the Bush administration’s fiscal year 2004 budget proposes to limit federal outlays through 2008 to 19.7 percent of GDP. By comparison, federal outlays averaged 19.8 percent of GDP from 1950 to 2002.

The president’s budgets have also stressed his commitment to economic policies that let people earn more and keep more of what they earn. Since January 2001, President Bush has proposed and signed three modest tax cuts into law. The first tax cut helped make the recession of 2001 one of the mildest on record. The second tax cut encouraged business investment and provided additional insurance against the economic uncertainty that followed September 11, 2001. The third tax cut will solidify the economic recovery. The result will be more jobs and stronger economic growth.

For more than 200 years, America has thrived on a regimen of low taxes and limited government. True fiscal discipline embraces these virtues; the President’s fiscal policies embody them.

— J. Edward Carter is an economist from Washington, D.C.

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