Archived Story

Much ado about nothing

Published 11:00pm Wednesday, October 23, 2013

By Daniel Sutter

Last week’s deal to raise the debt ceiling and reopen the Federal government failed to address, much less solve, the looming fiscal train wreck. The deal means that America’s biggest industry – government – can get back to business-as-usual.

How significant has the Federal government become? The Washington metro area is home to 6 of the top 10 U.S. counties in median household income, and Maryland ranks first among states. Connecticut and New Jersey used to trade off this honor, thanks to New York City’s wealth creation (and high taxes). The high income counties with the fastest income growth are also clustered around our nation’s capital. And Washington ranks second among twenty metro areas in home price increases since 2000.

I am not opposed to paying government officials fairly. Citizens should demand that their tax dollars be well spent. To do this, all levels of government must hire qualified and talented managers, who must be paid salaries sufficient to attract them to government. Paying market salaries to “necessary” workers is not the problem.

Most Washington bureaucrats, however, do not contribute directly to our economy. The Department of Education, for example, does not teach any students. As government grows, fewer resources remain in the private sector to produce goods and services. That the Federal government is the source of so many high paying jobs epitomizes our fiscal dilemma.

Will Congress and the President ever address our budgetary problems? The near-term prognosis is very positive, thanks to gridlock. Federal spending is about to fall for the second year in a row, which has not occurred since after the Korean War. Tea Party influence in the Republican-controlled house should check President Obama and limit spending through 2016. If the economy avoids another recession, the budget deficit will continue to decline.

Yet the long run prognosis, due to projected increases in entitlement spending, remains bleak. Republicans and Democrats might well agree next year on another fake budget deal promising spending cuts. The cuts will likely prove illusory for two reasons. The first is baseline budgeting, which automatically projects budget increases to maintain current service levels. “Cuts” are then made relative to projected spending levels, allowing spending increases to be labeled cuts. The news media, though, dutifully reports any deal as involving budget cuts. Second, most of the cuts in budget deals occur in future years. Congress cannot prevent future Congresses from reversing the cuts, so the promised cuts rarely occur.

I am pessimistic about avoiding this fiscal train wreck because raising taxes cannot solve our deficit spending problem. It might seem like I’m spouting nonsense here, since if tax revenues go up, the deficit should go down. Yet history shows that spending will rise if taxes increase.

Speaker of the House Tip O’Neill promised Ronald Reagan $3 in spending cuts for every $1 in tax hikes in the 1982 budget deal to address a then-record budget deficit. Federal spending instead increased 17% over the next three years. Spending rose 18% in the five years after President George H. W. Bush reneged in 1990 on his famous “Read my lips: No new taxes” campaign promise.

Why does this happen? The budget process in Congress separates tax and spending decisions.

Interest groups besiege the Capitol requesting new or increased spending, and Congress, as constitutional historian Charles Warren put it, plays Santa Claus. Playing Santa Claus on Christmas morning is more fun when you have more and better presents to hand out. And Congress gets to play Santa Claus with our money. Congress spends all of the available tax revenue, as we saw after the 1982 and 1990 budget deals.

States exhibit this problem as well, spending all their new tax revenue when the economy is strong, only to have to make painful cuts when revenues inevitably fall in the next recession.

Averting a train wreck will require people, politicians, and pundits to understand that raising taxes will not solve Washington’s spending problem. Some Republicans elected since 2010 seem to get this, and I have hope for the people, but the pundits seem beyond hope on this matter.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

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