Friday, October 7, 2011

Spending is THE Problem

Possibly the greatest miscalculation ever made by Republicans was the idea championed by Ronald Reagan and Milton Friedman that by reducing taxes, rational forces would take hold and cause government spending to decline.  Those two men realized that the increasing size of the government trampled on individual rights, limited economic growth and would, unless checked, eventually lead to collectivism, which has resulted in declining standards of living whenever it has been tried.

What Reagan and Friedman failed to realize, though, is that there is more than one way to feed the Beast.  The debt markets' insatiable appetite rendered their method moot--so long as the government could sell bonds to cover any revenue shortfall, cutting taxes would have no impact at all on government spending.

While Reagan was able to slow Leviathan's growth, he could not stop it completely, let alone reverse it.  After Reagan, the Republican understanding that the size of government is the problem and that the success of tax cuts was dependent on follow-on spending cuts, somehow was transmuted into a belief that lower taxes on their own would spur economic growth.  George W. Bush clearly didn't understand that cutting taxes without cutting spending was a recipe for disaster since it would yield no net increase in the capital available to grow the economy--government just sucked the proceeds of the tax cut right back up on the debt markets.  Furthermore, by significantly increasing the government's spending--primarily on the Iraq and Afgan wars--he only made things worse.

The problem, as Reagan and Friedman discovered, is that its really hard to take something away once it has been given.  It's easy to cut taxes when you control both houses of Congress.  But cutting spending is almost impossible.  [Even now under President Obama all of the talk of spending cuts is a fraud.  The only thing proposed to be cut is the rate that spending grows.]

So Reagan and Friedman put the cart before the horse in thinking that responsible parties would prevail.  They realized that government spending was the problem but tried to indirectly finesse the issue by taking away its fuel through tax cuts rather than face it head on.  Their vision failed because they had no concept that the United States could continue to operate in such a fiscally irresponsible manner even if its revenue was constrained.

Cutting taxes only makes sense when it is combined with spending cuts; cutting taxes without cutting spending is a recipe for disaster.  Unfortunately for the Left, using the same understanding of money and capital flows, it is also clear that their prescription, increasing taxes without cutting spending, would be just as bad, as any purported impact on the budget deficit would be negated by the impact on the economy.  There is no getting around the fact that the size of the government is the problem.  Whether it is funded by taxes or debt is largely irrelevant.

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