The Politics of Deficit Spending
FEBRUARY 01, 1987 by HANS SENNHOLZ
During the first 150 years of U.S. history, it was a maxim of political economy that the federal government should balance its budget. The only exception was allowed in wartime when deficits were deemed to be unavoidable. But when the war emergency had passed, the federal government was expected to repay the debt as soon as possible. It was made to run surpluses for 28 consecutive years after the Civil War, and for 11 consecutive years after World War I.
The debacle of the Great Depression together with the sway of Keynesian economics gave rise to a new belief that, in periods of economic decline and stagnation, budgetary deficits could serve to stimulate economic activity. But the deficits should be offset by surpluses in periods of prosperity so that the budget would remain in balance over the business cycle as a whole. As was to be expected, the “contracyclical budget” did not bring about stability and did not remain in balance. Instead, it invited politicians and government officials to engage in wasteful and self- interested expenditures, it not only sanctioned executive and bureaucratic profligacy but also encouraged congressional “pork barreling.” In short, it bred huge budgetary deficits not only during recessions but also at other times.
Since the coming of the Great Society even the Keynesian modicum of fiscal discipline has gradually slipped away. Budgets still are viewed as contracyclical tools, but primarilyare used as a free-for-all for special interests. In boom and recession the federal government now suffers substantial deficits. In fact, in 24 of the last 25 years it incurred deficits that grew larger nearly every year—exceeding 2.5 per cent of gross national product in all but one of the past ten years and averaging over 5 per cent in the last three years. Fourteen cents of every dollar spent by the federal government now come from lenders rather than taxpayers.
The growing deficits have left a mountain of Federal debt. By the end of World War II, it had soared to some $245 billion and 133 per cent of gross national product. Although a substantial further increase in dollar debt occurred between 1946 and 1971, the ratio of debt to GNP fell sharply and by 1971 had fallen to prewar levels. Most of this was the result of inflation which accelerated the rise of GNP in monetary terms and depreciated the debt. By 1981 the Federal debt exceeded the one trillion dollar mark and amounted to 33.6 per cent of GNP. In 1986 it climbed above the 2 trillion mark and some 50.4 per cent of GNP. At the present rate of deficit spending it will reach 3 trillion dollars and surpass 60 per cent of GNP before the end of the decade.
The record of deficit spending depresses and frightens most Americans. They worry that they are living on borrowed time that some day must end, or in a dream world that will crash like the stock market in 1929. They sense that something is wrong and that, in the end, the Federal debt will hurt their own financial situation. After all, debts need to be paid, even government debts. But this concern among voters is difficult to grasp as a tangible, solvable problem. They do not see the deficit as an immediate threat nor do they perceive a crisis that needs to be solved today. Therefore, they are unwilling to take the painful steps that are believed to be essential to reduce the deficit drastically.
The American people overwhelmingly support reduction in Federal spending, but they balk at virtually every proposal of specific cuts. A nationwide poll conducted by The Wall Street Journal and NBC News, for instance, found that many Americans express alarm about the Federal deficit, but resist any attempt to reduce Federal spending. The poll found that 86 per cent oppose reductions in Medicare benefits, which the President had proposed in his budget message, while 69 per cent oppose spending reductions on social programs for the poor. Half oppose the President’s elimination of Federal subsidies to local mass transit systems. But they also oppose proposals to boost Federal taxation. Some 56 per cent oppose income tax boosts.
Many Americans deny that, at the present, the deficit has a direct impact on their lives; but they are convinced that spending cuts and higher taxes would. The latter are real, but the value of balancing the budget is very abstract. Spending cuts could adversely affect some 90 million Americans who depend on government dollars for support. There are more than 35 million elderly who receive old-age social security, railroad, veterans, Federal civil service, and state and local retirement benefits, some 9 million recipients of survivor benefits, 6 million beneficiaries of supplemental income programs, 6 million unemployed individuals and their dependents, and finally, some 2 million individuals in the armed services and more than 16 million government employees who in turn support some 20 million dependents.
A Legacy of Federal Budget Deficits (in billions)
1969 $3.2 (surplus)
Expressed in terms of Federal assistance for those deemed poor and needy, the federal government, through Medicaid and Medicare, pays for the medical care of more than 50 million aged, disabled, and needy Americans. It subsidizes approximately 95 million meals per day, or 14 per cent of all meals served, through the food stamp program, child nutrition program, nutrition programs for the elderly, and commodity distribution programs. It provides training for almost one million low-income disadvantaged people and pays housing assistance to some 3.4 million American households. And it offers some 6.9 million post-secondary awards or loans to students and their parents through student assistance programs.
Many Americans undoubtedly would view deficit spending in a different light if its dire consequences were more clearly visible. If it were accompanied by rampant inflation or deep depression with mass unemployment, they would disapprove it immediately. Surely, they would not tolerate it as a deliberate policy if the harm it inflicts on nearly every voter, including the direct beneficiaries of the deficit largesse, were to exceed visibly the benefits of the spending.
But the harmful consequences of deficit spending are not clearly visible in the haze of popular notions and prejudices. It takes economic knowledge and logical reasoning to perceive that deficit spending consumes economic wealth and substance and mortgages the future, that it is a potent prescription for stagnation and poverty, an open invitation to monetary inflation and depreciation, and a free-for-all for social and political conflicts. Moreover, the perception tends to be clouded by the enticements of the benefit programs. Ninety million beneficiaries of spending programs are likely to question the validity of economic knowledge and the cogency of economic reasoning as long as they expect to gain from the largesse.
To most Americans the day of reckoning seems far off; deficit reduction may be a vaguely moral imperative that lacks financial significance. To most members of the U.S. Congress who incur the deficits and pyramid the debt, the issue is purely materialistic. Unaware of any questions of morality of deficits and debts, they are guided by political pragmatism aimed at “solving problems,” especially the problem of getting re-elected and advancing their own political careers.
In June 1982, President Reagan created a commission to conduct a “private sector survey on cost control” of the executive branch of the federal government. The commission, named after its chairman, New York businessman J. Peter Grace, conducted a comprehensive study of government efficiency in order to identify—and hopefully eliminate—wasteful spending in government. It soon concluded that much of the responsibility for excessive spending lies not with the Administration but with Congress. In a scintillating tract called Pork Barrel, Randall Fitzgerald and Gerald Lipson, two of Peter Grace’s associates on the Commission, tell the unexpurgated Grace Commission story. In more than one hundred examples of pork barreling by members of the Congress, almost evenly divided between Democrats and Republicans, liberals and conservatives, the authors illustrate the appetite for political spending. Most politicians live by a “parochial imperative” that elevates local interests over all others. In particular, it makes the members of Congress bring new Federal spending into their districts no matter how dubious and unnecessary it may be; they are to secure subsidies to any and all economic interests in their districts and prevent changes or reductions in the size of Federal spending by Federal facilities at the local level; they are to prevent competitive bidding procedures if this benefits local interests, and bring about the cancellation of state and local liabilities to the federal government when they become burdensome.
Most members of Congress living by the “parochial imperative” are guided by erroneous notions and doctrines. They act under the misconception that local interests, as they see them, coincide with the national interest. To promote trade, commerce, and industry in their district, they are convinced, is to promote economic life in all other districts. When one district is made to prosper, the prosperity of all is enhanced.
But such reasoning is rather spurious; it ignores the fact that the favors granted in one district demand material sacrifices from people in all districts. The entitlements of some individuals must ultimately be matched by tax exactions from other individuals. Parochial politicians plead the case for “special local interest” which differs fundamentally from “local interest properly understood.” The former always necessitates government coercion to confer benefits and grant privileges to some people and withhold them from others. The “properly understood local interest” calls for no coercion by police, judges, and tax collectors; it actually reduces coercion and restraint and concurs with the national interest, even the international interest. It calls for expansion of the sphere of individual freedom to satisfy human wants and sustain human life, the freedom that embodies the right to the fruits of individual effort, which is the quintessence of private property.
To justify benefits and privileges, parochial politicians argue like the talkative highwayman who lectures his victims about the benefits of more equitable distribution that is to benefit everyone, even his victims. He ignores the fact that the highwayman principle, when practiced by everyone, would render economic production rather hazardous and, in the end, gravely jeopardize human existence.
To serve the parochial imperative, legislators seek to expand the scope of their concern for administrative activities to include minute details of operations. They practice “micromanagement,” which is congressional involvement in day-to-day management decisions. Congress may direct executive branch agencies to employ more labor than the agency managers say they need, to place labor in locations where they are not needed, to prevent changes in the size or location of offices and agencies. Congress may order the Veterans Administration, with more than 200,000 employees, to seek congressional approval for any reorganization affecting as few as three employees. Individual senators and congressmen may obtain special legislation that takes funds from the public treasury to grant favors to this group or that faction, who in turn promise re-election.
Any administrative effort to streamline and modernize the government’s organizational structures is met by persistent congressional resistance, which keeps most operations obsolete, inefficient, and costly. Members of Congress usually intervene to thwart or delay structural reorganization. They in turn are pressured and made to block the way by government employees directly affected by reorganization. Waxing on human and financial losses which reorganization and consolidation would inflict on them, employees and their unions exert direct pressure through protest marches, letters, and telephone calls, and generate indirect pressure enlisting the support and influence of congressional staff that often depends on them for information, advice, and help.
It is the function of boards of directors of private corporations to set basic rules and policies. To set aside or waive the rules in order to benefit friends or associates is gross nepotism and corruption that may call for indictment and punishment. The U.S. Congress writes the rules for administrative operations, but all too often turns around and makes exceptions to the rules. Influential members of Congress usually exercise the very kind of favoritism which the rules were supposed to prevent. They write program rules, and immediately make exceptions for friends.
Basic principles of sound management require executives to have the authority to use labor most effectively, to assign it in the service of customers, and change assignments to meet changing business needs. In private enterprise, this authority is a basic ingredient of efficient management. In the U.S. Government, Congress frequently negates this management authority in order to protect Federal employees against the kinds of change and challenge which employees of private corporations face all the time. Many members of Congress act like union stewards whose primary concern is the convenience of their members. But, in contrast to union stewards, legislators have the clout to turn their concerns into law.
Eugene McCarthy, long-time U.S. Senator from Minnesota, explains congressional profligacy in terms of a “double standard” of economic rationale—one standard at home, and another for the rest of the country. Members of Congress readily declare their great commitments to frugality and austerity in all matters that are of no visible account to their constituents, but unflinchingly champion the special interests in their states or districts. The local press, radio, and television, even the Chamber of Commerce, and especially the member’s political opponents adhere to the same double standard. They expect members of Congress to wax eloquent about frugality and then give tangible evidence of their effectiveness by having the federal government build a new post office, a government office building, a veterans’ hospital, housing for the elderly, more roads, bridges, etc. But nothing reveals the double standard more clearly, according to Senator McCarthy, than a water project, a dam, lock, or canal, that may be named after the politician who sponsored it. Even the most frugal fiscal conservative who says “no” to many transfer programs may readily spend billions of dollars for the illusion of immortality through enduring government projects named after him.
Running a close second in congressional popularity are military installations. They enjoy popular support on a variety of grounds: national security, national tradition and history, and regional economic impact. The Department of Defense is spending more than $20 billion a year to operate some 5,000 military installations and properties, many of which have become unnecessary, inefficient, or uneconom-ical. Every state and more than one-half of all congressional districts contain or border on military bases and installations that bring generous payrolls and lucrative procurements. They yield income and wealth to the districts although the posts may be visible reminders of the Civil War, or even the War of 1812. They may be military anomalies, well suited for military museums, but they continue to withstand all attempts at closing them.
Like Congress, the executive branch has its own pork barrel projects. After all, it consists of politicians who come to power by the same imperative that brings the members of Congress to Washington. Politicians in power broaden and extend the imperative to include the whole nation, which costs billions of dollars. A congressman may deem himself efficient and successful to land a one-million dollar government contract for his friends in the district. But the President of the United States, as the November election approaches, may propose Federal expenditures costing tens of billions of dollars.
During the 1964 election Lyndon B. Johnson introduced his Great Society by declaring “war on poverty” and promising to eradicate it within this century. When elected by a landslide, he built his particular pork barrel with government projects benefiting his followers. He sponsored the Economic Opportunity Act of 1964, established the Office of Economic Opportunity, and introduced many new antipoverty programs. The landmarks of his Great Society are easy to identify: the Social Security Amendments of 1965, creating health insurance programs for the aged and needy through Medicare and Medicaid; the Elementary and Secondary Education Act of 1965, which constituted the first general school aid legislation, targeting money to schools with poor children; the Housing and Urban Development Act of 1968, which meant to help low- and moderate-income families buy their own homes; and the Civil Rights Acts of 1964, 1965, and 1968, prohibiting racial discrimination in schools, employment, housing, and public accommoda tions.
In 1972 President Nixon sought to imitate his predecessor through increases in Social Security, involving many billions of dollars. It is a clear example of both the Congress and the Executive rolling the pork barrel back and forth and claiming full credit in the end. As the November 1972 election approached, the President recommended a 5 per cent boost in Social Security benefits, which would sit well with elderly voters. Not to be outdone, the Democratic opposition demanded a 10 per cent boost, which the President threatened to veto for being riscally irresponsible. To outmaneuver and embarrass the President, Congress finally enacted a 20 per cent raise and ordered it to commence immediately. Surely, the President was expected to veto a 20 per cent raise, having threatened to veto any increase above 5 per cent. But instead, he readily signed the ploy into law and informed all recipients, in a note accompanying Social Security checks, that he had signed the bill. Both the President and members of Congress now claimed credit for the payments.
A favorite executive stratagem designed to obtain an advantage over one’s political opponents is to sponsor new spending on grounds that one is merely “heading off” a congressional move to increase the spending. The President may double and triple Federal outlays for agricultural price supports, saying that he is merely heading off a congressional move to boost the support prices even further. Congress in turn may try to head off the President. Each tries to outdo the other in currying the favors of special-interest voters.
The spendthrifts of Congress and the profligates in the Executive receive encouragement and support from an army of civil servants who actually do the spending. They are the regulars of the administrative organization, the bureaucracy which is ever eager to spend more money.
In business, profit-and-loss calculations limit a businessman’s temptations to expand his ser vices. Business accounting, which ascertains success or failure of an operation, reveals the desirability of capital expenditures. In particular, it discloses the return from an investment in relation to the capital outlay. When the costs of an outlay exceed its return, the businessman must retrench and restrain his ambition. Failure to do so would invite losses, which would cast serious doubt on his managerial ability.
But a government agency or bureau faces no such limitation. Its services, no matter how valuable they may be, have no market price and, therefore, cannot be subjected to profit-and-loss accounting. They are open-ended unless they are restrained by precise rules and regulations, that is, bureaucratic directives. Lest government agents become irresponsible spenders of the taxpayers’ money, they need detailed instructions about every aspect of their operations. Thus, forever restrained by rules and regulations, they are anxiously pleading for more authority and more money.
The Federal budget is permeated by the notions and doctrines of “higher” moral objectives. But in workaday, prosaic terminology, it seeks to favor some people at the expense of others. It is a plan of action estimating the costs of political transfer, and a public declaration proclaiming the politics of deficit spending. As such it reveals much of both the theory and practice of public morality.
1. Budget of the United States Government, Fiscal Year 1987, pp. 6e-45.