The real cause of America’s fiscal crisis and how to fix it.
By James L. Payne
Washington is now deep into the process of attempting to deal with the
budget deficit, an exercise that leaves experienced observers with a sinking
feeling. Presenting plans to cut spending and balance the budget is like the
proverbial activity of rearranging the deck chairs on the Titanic. It involves
a lot of busyness but does not address the real problem.
After all, we’ve been enacting plans to control spending and balance the
budget for generations. One of the first efforts was the 1974 Budget and
Impoundment Control Act passed in the Nixon administration. Then we had
the Gramm-Rudman-Hollings Act, signed into law by President Reagan in 1985. A
few years later, in 1994, feisty Republicans took over both houses of Congress
and provoked a government shutdown in the crusade for fiscal responsibility.
The lesson of history, then, is that you can’t cut spending by trying to
cut spending. It’s a hard point for budget makers to digest, because it seems
to defy the rules of arithmetic. Well, when it comes to national budgeting,
these rules don’t apply. What matters are the rules of political perception.
Most Americans perceive that government is an effective provider of
valuable services. They see it as a super store that supplies education,
medical care, retirement income, housing, assistance to the needy, safe drugs,
safe foods, scientific research, and so forth. That’s why spending cuts can
never be more than temporarily effective. As soon as the specifics of the
cutting become apparent, the public will be reminded how very much it likes government
programs. As people learn about the autistic child who will be left unassisted,
the hospital that will close, and the food inspectors who will be laid
off, the public clamors to fund these functions, and the campaign to cut
spending falters. We’ve been through this cycle many times.
The lesson is clear: The real cause of red ink is the widespread belief
that government programs are effective responses to national needs. If
you don’t counter this belief, you can never really cut government spending.
Faith in Government
Where does this confidence in government come from? One possible
answer is that it is based on reality and that we have numerous careful,
unbiased, scientific studies that prove government is a cost-effective provider
of services.
There are several difficulties with this position. The first problem is
there are no such studies. There are studies that purport to
evaluate government programs, but they never include all the
overhead costs. By my count, there are 14 overhead costs in the typical
government transfer program, seven involving taxation and seven involving
disbursement. Such cost-benefit studies as have been done include, at best,
only three or four of these costs. The reason why evaluations of government
action are shallow and incomplete is the bias of the researchers. Before they
attempt their study they already believe government action is beneficial. In
other words, the cart—the belief that government is effective—comes before the
horse—the evidence that it is.
Historically, too, confidence in government has preceded the evidence that
might justify such confidence. The modern faith in government as a
problem-solving machine emerged in the late nineteenth century, decades before
any interventionist policies had been attempted. For example, in 1888 Edward
Bellamy published a hugely successful utopian novella, Looking Backward,
which posited a federal government in charge of everything, and solving all
problems of poverty, unemployment, old-age assistance, and so on. Bellamy and
the thousands who formed “Bellamy Clubs” all around the nation had no way of
knowing if government programs in these spheres would be cost-effective
solutions. They took it on faith.
The belief in government efficacy is not empirically based. It is the
product of illusions. When they first notice government, children tend to see
it as a super-parent, an authority figure that has many virtues — including
great wealth, foresight, objectivity, and maturity — and is without ugly vices
such as selfishness, irresponsibility, callousness, and a tendency to violence.
This benign impression forms the basis of the popular view of government. Over
time, as the result of actual experience with government, people begin to
overcome this naïve faith, but in most cases they do not move far beyond the
child’s view. They continue to see government as a machine that can fix
everything — if only the right people are put in charge. Telling a public with
this naïve confidence that spending should be cut is like trying to tell a
child that a birthday cake should not be eaten: It has no understanding of, or
sympathy for, the recommendation.
Toward a Solution
To restrain spending, therefore, one needs techniques that counteract the
mistaken, illusion-based view of government. These measures will not resemble
traditional spending reforms. They will not be laws that address the amount of
spending. Instead, they will address the perceptions underlying
spending, since once those attitudes are corrected, the pressure for spending
will abate. To illustrate this approach, consider the simple idea of reminding
people where government money comes from.
One misunderstanding that gives the public a false view of government is
the philanthropic illusion. This is the idea that government has
money, that it is like a wealthy philanthropist with extra cash to give to
needy people and worthy causes. In fact government has no money of its own. The
money that it spends has to be first taken away from taxpayers, and if you do
the arithmetic carefully, tracing out all the indirect and shifted burdens of
taxation, you will discover that everyoneis a taxpayer. Therefore,
to get money for its spending programs, government inflicts privation on everyone,
including low-wage workers, college students, the homeless, and so on, and it
drains resources from vital activities like technological innovation, medical
care, job creation, and so forth.
Declaration of Gratitude
Under the spell of the philanthropic illusion, politicians and the public
downplay or forget the harm and injury of taxation. A simple device that will
help counteract this myopia is the “Declaration of Gratitude.” Everyone who
receives government money would be required to sign this statement:
I realize that the funds I am about to receive come from the nation’s
taxpayers, and I am grateful for the sacrifices they are making on my behalf.
Its administration is simple. When you fill out the paperwork for any
government grant, subsidy, or payment, you also must sign the statement,
whatever the benefit: food stamps, cotton subsidy, small business loan,
government paycheck, research grant.
In monetary terms, signing this statement doesn’t change anything: Everyone
gets whatever government dollars he was going to get. No one can be accused of
starving grandma. What it does do is change the psychological climate. It
destroys the assumption that government spending harms no one. This frank
reality is covered up today. Take the Earned Income Tax Credit. This is a $50
billion welfare program, yet the people receiving this benefit call it a “tax
refund” when they get their check. Most of them have no idea that this is a
subsidy paid for by taxpayers. Well, if they had to sign the Declaration of
Gratitude, they would know.
There is likely to be a lot of resistance to the Declaration of Gratitude
idea. Most Americans seem to feel themselves “entitled” to whatever government
funds they get, and are loathe to recognize their dependent status. This
entitlement mentality produces the bizarre contradiction of a country with a
national debt of $15,000,000,000,000 whose citizens believe they are paying
their own way.
But resistance or no, reforms that change the perceptual climate are
essential for national economic health. Sound fiscal policy will not be
achieved until the public attains a disillusioned view of government.
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