The View From 1776
Tuesday, February 28, 2006
Federal Budgets: The Starting Point
Budgets were not originally open-ended wish-lists. The New Deal changed that, inflation commenced, and deficits have become the norm.
Historically, the study of economics grew out of budgeting for the political state and necessarily reflected the prevailing political and philosophical views. Federal budgeting today is still blighted by the welfare-state philosophy of the New Deal. This means that avoiding inflation and budget deficits, over the long term, is impossible.
When economics developed as a separate intellectual discipline in the 18th century, it was then called ‘political economy,’ a term that better depicts the function of doctrine than our present-day term ‘economics.’ Political economy, in conjunction with government budgeting, was the study of the most productive and beneficial ways to allocate economic resources that are limited in the short run, as well as how to set tax policies and government regulation most effectively to encourage increased production of economic resources.
Today in the United States budgeting starts, not with allocating known revenues, but preparing special-interest wish-lists, many of which conflict with each other, then fighting over whether to raise taxes or borrow to fund these wish-lists.
As John F. Cogan notes in The Concise Encyclopedia of Economics, “The congressional budget process itself has contributed mightily to persistent budget deficits. The most important feature of the current budget process is its decentralized nature. At no point in the process does anyone decide on the total amount the federal government will spend. Instead, responsibility for individual legislative bills that determine the total amount of spending is divided up among fifteen separate committees in the Senate and seventeen committees in the House of Representatives…. This decentralization of spending authority creates powerful incentives for deficit financing.”
The result is what French socialists discovered early in the 19th century: intellectual planners can’t control the process, because the voters are impelled, not by their needs, but by their limitless desires for more. This is known as butchering the hog and dispensing the pork, a process not designed to promote either the health of the economy, or the general welfare.
The Federal budgeting process was not always so. Mr. Cogan observes that Federal budget deficits were non-existent or inconsequential from 1799 until 1885, while the budgeting process was centered in a single committee is each house of Congress. During the Progressive era, from 1886 until 1921, budget deficits were the norm under decentralization among different Congressional committees. Under conservative Republican administrations, from 1922 until the impact of the Depression in 1931, the budgeting process was again centralized, and the Federal government spent less than its revenues, producing an explosion of business growth.
Franklin Roosevelt’s New Deal poisoned the process and we have never recovered from the debilitating effects. FDR raised income tax rates from the 20 percent range to more than 80 percent, strangled business with a host of new regulatory agencies, created welfare-state income-redistribution programs, and reverted to decentralized budgeting.
After virtual price stability throughout the nation’s history, apart from wartimes, the erosion of steady, unrelenting inflation commenced in 1932. Keynesian economics, still the guide book for liberals, decreed that unemployment could be prevented only by Federal deficit spending. The only concern was finding new devices to augment deficit spending.
Private business was believed to be incapable of returning to its activity level of 1929, so the Feds would have to take over the role of employing people and funding new technology. Hence the burgeoning numbers of Federal agencies.
Deficit spending and inflation slackened when Presidents Kennedy and Reagan cut taxes, and when President Clinton was compelled by newly-elected Republican Congressional majorities to do the same. President Clinton’s short-lived budget surplus was a mirage produced by the temporary confluence of the dot.com business bubble and one-time, huge reductions in military spending (which encouraged Al Queda’s 9/11 attack).
As a formal discipline, political economy took flight in the 18th century in France and England. For the United States, Adam Smith’s “Wealth of Nations” was, until the Progressive era, the guiding doctrine. Smith famously declared that the true wealth of a nation is, not its fixed resources such as land and gold (as in the case of Spain’s New World conquests), but the freedom and ingenuity of its citizens.
Whence came the concept of laissez-faire, the idea that reducing government regulation and tariffs to the minimum and otherwise encouraging manufacturing and trade would cause citizens to produce far more useful goods and services than could any government ministries prescribing who should do what and how much should be charged.
This spotlights the unbridgeable chasm between economic understandings of the founders and those of present-day liberal-progressives, among whom are to be found a great many nominal Republicans.
The founders understood that people pioneer in the wilderness, start up new businesses, discover new technologies, and thereby raise the standard of living for everyone, because of their expectations. Today people invest in the stocks of companies based on their expectations about future prospects.
In contrast, liberal-progressives implicitly view the economy as a static fund of wealth. Their function is to divide that fund equally, without regard to merit, in accordance with socialistic concepts of social justice. As they do not subscribe to the concept of expectations as a driving force in economic affairs, liberal-progressives discount the demonstrated validity of President John F. Kennedy’s “rising tide that lifts all boats” as the justification for his huge tax cuts in the 1960s. They have denigrated President Kennedy’s insight as ‘trickle-down economics.’
It is this mindset that drives today’s Federal budget process and accounts for the endless harping by Congressional Democrats on ‘tax cuts for the rich.’ They remain fixated on the fact that the poor are not as wealthy as the top tier of the economy, because socialism preaches that the only meaningful freedom is the materialistic standard of equal access for everyone to any of society’s goods and services that he wants. Liberalism’s liberty is not a matter of the spirit, but of the dinner plate.
No thought is given to the effect of destroying incentives to risk-taking innovation by mandating that everyone must have as nearly equal income as possible. At the outset of the Clinton administration, the President’s economic advisors, urged on by Al Gore, pushed for creating in the United States what was then called Japan, Inc. ? the tightly regulated and integrated complex of huge Japanese manufacturing, trading, and banking enterprises under the tutelage of government ministries.
President Clinton’s advisors alleged that too many foreign companies were acquiring control of American companies and vital resources, that corporations were looking at short-term measures to increase the next quarter’s earning per share, without regard to the long run. We hear echoes of this today in the hullabaloo over the take over of management of some of our seaports by the Dubai Ports World organization.
The liberal-progressive prescription was to impose tighter controls on private businesses, to establish a national council to determine what were to be the important technologies in the future, and to allocate Federal funds to their research and development. Fortunately for our well-being, the vision was postponed when, sadly, Japan slid into an economic slump from which it is only now emerging.
The collectivist vision didn’t die, unfortunately, as evidenced by Al Gore and company’s strident advocacy of the Kyoto Protocols, designed to reduce our level of economic activity and bring us down to ‘social-justice’ equality with third-world economies.
The lesson to be drawn from this debilitating tinkering by liberal-progressives is that, unless we return to centralized budgeting and start with a fixed ceiling for total Federal spending, inflation will accelerate, the dollar will tank, exponential growth of Social Security and Medicare entitlements will bankrupt us, and Al Queda madrassas will be teaching Arabic to your grandchildren while they memorize the Koran.