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Cut Spending Too

It's not a sacrifice.

by James Leroy Wilson
May 29, 2003

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Cut Spending Too_James Leroy Wilson-It's not a sacrifice. In his history of the United States The American Story, Garet Garrett notes that part of the reason America won the Revolutionary War and escaped humiliation in the War of 1812 was that Britain's treasury was getting low. He mentions this only in passing, but there is an important lesson for today. We think that if the government is getting low on cash, it can just borrow more, or print up some more. But money back then was understood as fixed weights of gold and/or (sometimes) silver. Britain could not afford today's practice of borrow and spend, precisely because it had no means to inflate the money supply. Money wasn't a function of how much paper can the government print money on, but rather a note that could be exchanged for gold. Yes, governments incurred debts, but then the question for the British was whether continuing the war against Americans was worth it. It wasn't able to just print up more money for itself.

The world isn't like that anymore. The World Bank and the International Monetary Fund both believe the value of money should be determined by politically-appointed government central bankers, not by gold. The result is an illusion that the government can generate wealth by borrowing and spending, although this is really robbing present and future generations.

President Bush saw another tax cut passed. This is good news, particularly as it alleviates some particularly grievous injustices like double taxation on corporate profits and the marriage penalty. But he's not matching tax cuts with spending cuts, which means he's forcing future workers to foot the bill.

Don't get me wrong. I understand that tax cuts can generate greater tax revenues over all - if not in the first year or two, then down the road. The less an economy is taxed, the more money there is for private spending or investment. This happened with both Kennedy's and Reagan's tax cuts (it just so happens that spending soared to still greater heights under Reagan.) Lower tax rates stimulate growth and create jobs, meaning more taxpayers.

This is fine, as far as it goes. But it neglects the other side of it. If government confiscation of wealth (taxes) is bad for the economy and tax cuts good, then it must also be true that government confiscation of goods (that is, government spending) must also be bad and spending cuts good.

How is government spending a form of "confiscation?" Murray Rothbard explains it well in Man, Economy, and State. Its quite simple really. When government decides to buy a good, like paper or military tanks, it distorts what is really desired in the free market. What the government buys is taken out of the free market, leaving less for the rest of us and thereby driving up the price. Also, government as consumer diverts the market from what it would do normally, to what the government wants. Industries that might be focused on curing cancer, now, thanks to the government, have the incentive to design and build e-bombs instead. The greater the proportion of government spending in an economy, the less free it really is, if for no other reason than that the market no longer reflects the real choices of individuals but rather the choices of government.

This is true regardless of how the government gets its money. If taxes don't meet expenditures, government borrows money, which drives up interest rates and further distorts the economy. Further, the payment of interest on the debt takes money away from future taxpayers. And if the government decides to print up more money to spend on the good it wants, it then pours that money into the market, reducing the value of each dollar. Therefore, prices go up. A person's income can't buy as much today as yesterday, because the government flooded the market with more money. So this is another means by which government, in effect, confiscates wealth.

The less government spends, the less of these evils it would inflict on society. Often, the political consensus is that cutting taxes is popular, but cutting spending is a "sacrifice." Not true at all. The less government spends, the more the market would flourish, as it would be directed by individuals pursuing their own wants unaffected by the distortions of government spending.

The most obvious objection is, what about the people who live off of government spending? This could be bureaucrats on the government payroll, people living off of the State's charities, or those working in industries in which the government is the major customer. This last group will merely direct less of their energies to serving the needs of the government, and will serve other customers instead. Those who the government lays off, or those in the government's charities who are able to work, will not suffer. In fact, they might benefit, provided that one of the things government cuts is its regulations, licenses, and other impediments to free entry into the workforce or into any industry.

That leaves the truly "helpless" who may have lived on the government's dime. While their dependence on the government would now shift to families and private charities, this would actually encourage greater social cohesiveness and sense of personal responsibility to help the underprivileged, now aware that there is no government program available. Charities would more likely treat the helpless as persons, not as a "case" in a bureaucrat's "caseload."

So it is not a sacrifice to cut government spending. It saves us from market distortions and inflation, and future generations from debt servicing. Politicians who endorse tax cuts ought to endorse spending cuts as well. Alas, it's not likely to happen, because a politician who would propose such a thing would basically be admitting that government is the cause of, not the solution to, social problems. And why would anyone who believes such a thing become a politician?

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