Spending Limits Are Not Enough; J. Semmens

cuses on the government's deficit between receipts and expenditures. Beyond question, the perpetual re sort to deficit finance must result in the diversion of resources from the pri vate sector to the government's coffers. This can happen either through the ~~crowding out" of would be private borrowers when large public debt issues absorb available investment capital, or by inflating the money supply. The ~~crowding out" phenomenon shifts resources from more productive private pur poses to less productive government purposes. Inflation employs legal means to diminish the value of all dollar holdings and fixed income re ceipts. The havoc wrought in the corporate bond markets, where top rated bonds issued when interest rates were two and three percent now sell for fractions of their origi nal cost, is a dramatic demonstra tion of the ill effects of both phenomena. Stopping these ill effects is a worthy objective, but a balanced 459 460 THE FREEMAN August budget alone will not achieve it. The government may just as easily ba lance the budget by raising taxes as by cutting. spending. An increase in taxes does not require Congres sional action. The government has all the power it needs to increase taxes without going through the trouble of enacting new levies, al though the enthusiasm shown for the imposition of a uwindfall profits"

tax on oil illustrates the willingness of Congress to use manufactured crises as a means of raising taxes. Because the tax system is ttprogres sive," Le., the rates increase as the taxable resource rises in nominal value, the government can raise taxes by inflating the money supply. The heart of the President's plan to balance the budget is to increase the tax take by pushing taxpayers into higher tax brackets. While a balanced budget might be an improvement over the current situation, the key weakness of such a device as a control over govern ment spending is that it says noth ing about the magnitude of that spending. The primary evil in gov ernment spending is not that it is deficit spending, but that it is con suming ever larger proportions of the nation's wealth. In the last 50 years, the government's ((take" of the national income has risen from under 15 per cent to over 40 per cent. It is to remedy this situation that we have the proposals to limit government spending as a percent age of the national income.

Spending limitation measures have been discussed and even, in some jurisdictions, passed as a means of controlling the govern ment's appropriation of resources. Without limits, the projected out come of existing trends is for the government to consume the entire national income within 30 years. A number of proposals have been in troduced in Congress. Whether any of these can serve as a real con straint on spending, however, is doubtful. On the one hand, it is a fundamental principle of legislative procedure that a subsequent body of Congress cannot be bound by an action of a prior body of Congress. Any limitations legislated in one session may be overridden.by a sim ple majority vote in a later session. It is obvious, then, that if a spending limit is to be binding, it must come in the form of a Constitutional amendment. Limiting spending by Constitu tional means was the route taken by the Arizona Legislature in 1978.

The problem with virtually all of the proposals to use Constitutional means is the overwhelming reluc tance to draw a hard line on the spending issue. Such was the case in Arizona. While the Constitution now limits state spending to no more than 7 per cent of the personal in come of the inhabitants, the deter1980 SPENDING LIMITS ARE NOT ENOUGH 461 mination of what constitutes state spending is a matter of legislative enactment. Not all state spending is state spending, or so it seems. Cer tain categories of revenues and out lays are declared exempt from the spending ceiling. Curiously, the rationale for exemptions is that ser vices rendered for fees should be excluded from the spending limit. This says much about the character of the remaining outlays-namely, that they are not services rendered for fees. This is an admission that the bulk of state government expen ditures are for activities that would not be purchased on a fee basis.

One should not be surprised to discover attempts at reclassification of which expenditures are to be exempt. It is barely a year since the enactment of the Arizona spending limit and the legislature has already passed a measure designed to exempt additional gasoline taxes from the 7 per cent limit. The fundamental problem with the spending limits proposed to date is the lack of respect for basic pri vate property rights. The proposals rest on the premise that the gov ernment is entitled to take as much of the national income as it needs. This explains the uni versal provi sion for loopholes and escape clauses. In essence, the spending limi t proposals are concessions to the current taxpayer outrage. The government is willing to reach a temporary compromise and agree to limit itself to a specified percentage -unless it needs more for unfore seen ((emergencies." Valid as a contingency plan might be-the usual example is a conjured vision of world war-it will be abused. The government itself can create the emergency through its own ineptitude or malicious intent.

The ((emergency" in Arizona is the deterioration of the road system. If the rather drawn out consequences of inadequate highway maintenance can qualify as an ((unforeseen emer gency" that necessitates a breach of the spending limit, then there is, in fact, no spending limit. Arbitrary spending limits concede the government too much. The in voluntary nature of taxation has enabled government to decide for itself how much it will take from its citizens. Merely fixing a percentage limit does not deal with the valid issue of the purposes of government activity. It is all too likely that spending limits will serve to legitimize a claim to a portion of the national income that is not subject to question. If the government pro vides some services or encounters Hemergencies" it will have little dif ficulty enlarging its take. If there are genuine functions to be performed by governments, then the historical experience of man's economic activities quite clearly in dicates that the proportion of income 462 THE FREEMAN consumed in the provision of such services should be declining . No ser vices can be more valuable or neces sary than the provision of food, clothing, and shelter. The market place has been coping with the pro vision of these items for years. In the last 50 years, the proportion of the national income consumed in the production of food, clothing, and shelter has declined by 33 per cent, 50 per cent, and 17 per cent respec tively.

The efficiency of the free market is responsible for the decline in cost of these fundamentals of life. The pressure of competition drives suppliers to cut costs. The prosperity engendered by the free market en ables consumers' real income to rise so that individuals can afford more than just the necessities. The government is not subject to the forces of the marketplace. As a result, the proportion of the na tional income consumed in the pub lic sector has risen by 212 per cent during the past half-century. Insu lated from competition, government becomes less and less efficient. Bureaus and rules proliferate, con suming more resources to do less. Unable to generate a desirable pro duct, government, via legislation, simply helps itself to larger shares of consumers' income. Logic and experience warn that entitling the government to a fixed cut of the national income or demanding that its budgets be bal anced is not enough. The govern ment acts beyond the beneficial guidance of the market regimen.

This has bred a sloppiness that has led to a dangerous obesity of the public sector. For its own good, the government must be put on a more healthy diet. Its intake must be matched by its output. As much as is possible of its activities must be cut free from the tax-fed trough. Ser vices that are conducive to operating on a fee basis should be placed on a fee basis. Services which are not conducive to such an arrangement require an alternative regimen. Since, by definition, such services cannot be marketed, we must simu late the discipline of the mar ketplace. One apparent means of doing this would be to enforce spend ing reductions. Just as the shares of national income going to the produc tion of food, clothing, and shelter have been reduced, so too should government's share be reduced. A shrinking spending limit could serve as an artificial simulation for the pressures of competition.

Bloated as it is, the government cannot handle even its traditional responsibilities. It cannot protect its own diplomats. It cannot keep the streets safe. For its own good and for our own good, the government's de bilitating obesity must be more than halted, it must be reversed. Spend ing and taxation must be reduced.@) Jack D. Douglas Totalitarian Collectivism •In America UNOTHING IS more striking to a European traveller in the United States than the absence of what we term . . . government." So wrote Alexis de Tocqueville of American society in the 1830s. What Ameri can in 1980 could possibly think of our society as one characterized by an U absence of government"? Government at all levels now di rectly controls nearly forty percent of our wealth through direct taxa tion, yet anyone with a smattering of economic knowledge knows that the indirect taxation mandated by government regulation is also·huge.