The Politics of Deficit Spending; H. Sennholz

As was to be expected, the "contracyclical budget" did not bring about stability and did not remain in balance. Instead, it invited politi cians 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 budge tary 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 primarily Dr. Sennholz heads the department of economics at Grove City College in Pennsylvania. He is a noted writer and lec turer on economic, political, and monetary affairs. are 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 sub stantial 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. 1 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. Ambivalent Voters 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 situa tion. After all, debts need to be paid, even gov ernment debts. But this concern among voters is difficult to grasp as a tangible, solvable problem. They do not see the deficit as an im mediate threat nor do they perceive a crisis that needs to be solved today. Therefore, they are unwilling to take the painful steps that are be lieved to be essential to reduce the deficit dras tically.

The American people overwhelmingly sup port 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 ben efits, 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 op pose income tax boosts. 2 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 secu rity, railroad, veterans, Federal civil service, and state and local retirement benefits, some 9 million recipients of survivor benefits, 6 mil lion beneficiaries of supplemental income pro grams, 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. 3 Expressed in terms of Federal assistance for those deemed poor and needy, the federal gov ernment, through Medicaid and Medicare, pays for the medical care of more than 50 million aged, disabled, and needy Americans. It subsi dizes approximately 95 million meals per day, A LEGACY OF FEDERAL BUDGET DEFICITS (in billions) 1986 $220.7 1985 $213.4 1984 $175.3 1983 $195.4 1982 $110.6 1981 $57.9 1980 $59.6 1979 $27.7 1978 $48.9 1977 $44.9 1976 $79.4 1975 $45.2 1974 $ 4.7 1973 $14.8 1972 $23.4 1971 $23.0 1970 $ 2.8 1969 (surplUS) $ 3.2 1968 $25.2 1967 $ 8.7 1966 $ 3.8 1965 $ 1.6 1964 $ 5.9 1963 $ 4.8 73 74 THE FREEMAN. FEBRUARY 1987 or 14 per cent of all meals served, through the food stamp program, child nutrition program, nutrition programs for the elderly, and com modity distribution programs. It provides training for almost one million low-income dis advantaged 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 eco nomic knowledge and logical reasoning to per ceive 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 infla tion and depreciation, and a free-for-all for so cial and political conflicts. Moreover, the per ception tends to be clouded by the enticements of the benefit programs. Ninety million benefi ciaries of spending programs are likely to ques tion the validity of economic knowledge and the cogency of economic reasoning as long as they expect to gain from the largesse.

Congressional Profligacy 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. Un aware of any questions of morality of deficits and debts, they are guided by political pragma tism aimed at "solving problems," especially the problem of getting reelected 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. 4 In more than one hundred examples of pork barreling by members of the Congress, al most evenly divided between Democrats and Republicans, liberals and conservatives, the au thors 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 unneces sary 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 bid ding procedures if this benefits local interests, and bring about the cancellation of state and local liabilities to the federal government when they become burdensome. 5 Most members of Congress living by the "parochial imperative" are guided by erro neous 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 eco nomic life in all other districts. When one dis trict is made to prosper, the prosperity of all is enhanced.

But such reasoning is rather spurious; it ig nores the fact that the favors granted in one dis trict demand material sacrifices from people in all districts. The entitlements of some indi viduals must ultimately be matched by tax ex actions from other individuals. Parochial politi cians plead the case for "special local interest"

which differs fundamentally from "local in terest 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 col lectors; it actually reduces coercion and re straint and concurs with the national interest, even the international interest. It calls for ex pansion 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 ev eryone, even his victims. He ignores the· fact that the highwayman principle, when practiced by everyone, would render economic produc tion rather hazardous and, in the end, gravely jeopardize human existence.

Micromanagement To serve the parochial imperative, legislators seek to expand the scope of their concern for administrative activities to include minute de tails of operations. They practice "microman agement," which is congressional involvement in day-to-day management decisions. Congress may direct executive branch agencies to em ploy 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. Con gress 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 re sistance, which keeps most operations obso lete, inefficient, and costly. Members of ConTHE POLITICS OF DEFICIT SPENDING 75 gress usually intervene to thwart or delay struc tural reorganization. They in turn are pressured and made to block the way by government em ployees directly affected by reorganization.

Waxing on human and financial losses which reorganization and consolidation would inflict on them, employees and their unions exert di rect pressure through protest marches, letters, and telephone calls, and generate indirect pres sure enlisting the support and influence of con gressional 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 poli cies. 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 excep tions for friends.

Basic principles of sound managment 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, Con gress frequently negates this management au thority 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 con trast to union stewards, legislators have the clout to turn their concerns into law. Eugene McCarthy, long-time U. S. Senator from Minnesota, explains congressional profli gacy in terms of a "double standard" of eco nomic rationale-one standard at home, and another for the rest of the country. Members of Congress readily declare their great commit ments to frugality and austerity in all matters that are of no visible account to their constit uents, but unflinchingly champion the special interests in their states or districts. The local 76 THE FREEMAN. FEBRUARY 1987 press, radio, and television, even the Chamber of Commerce, and especially the member's po litical opponents adhere to the same double standard. They expect members of Congress to wax eloquent about' frugality and then give tan gible evidence of their effectiveness by having the federal government build a new post office, a government office building, a veterans' hos pital, 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. 6 Running a close second in congressional popularity are military installations. They enjoy popular support on a variety of grounds: na tional 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 installa tions and properties, many of which have be come unnecessary, inefficient, or uneconom ical. Every state and more than one-half of all congressional districts contain or border on mil itary bases and installations that bring generous payrolls and lucrative procurements. They yield income and wealth to the districts al though the posts may be visible reminders of the Civil War, or even the War of 1812. They may be military anomalies, well suited for mili tary museums, but they continue to withstand all attempts at closing them.

Executive Irresponsibility Like Congress, the executive branch has its own pork barrel projects. After all, it consists of politicians who come to power by the same imperati ve 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 con gressman may deem himself efficient and suc cessful 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 Fed eral 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 land slide, 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 Op portunity, and introduced many new antipov erty programs. The landmarks of his Great So ciety are easy to identify: the Social Security Amendments of 1965, creating health insur ance programs for the aged and needy through Medicare and Medicaid; the Elementary and Secondary Education Act of 1965, which con stituted 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 Secu rity, involving many billions of dollars. It is a clear example of both the Congress and the Ex ecutive rolling the pork barrel back and forth and claiming full credit in the end. As the N0 vember 1972 election approached, the Presi dent recommended a 5 per cent boost in Social Security benefits, which would sit well with elderly voters. Not to be outdone, the Demo cratic opposition demanded a 10 per cent boost, which the President threatened to veto for being fiscally irresponsible. To outmaneuver and em barrass the President, Congress finally enacted a 20 per cent raise and ordered it to commence immediately. Surely, the President was ex pected 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 oppo nents is to sponsor new spending on grounds that one is merely "heading off" a congres sional move to increase the spending. The Pres ident 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. Bureaucratic Management The spendthrifts of Congress and the profli gates 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 bureau cracy which is ever eager to spend more money. In business, profit-and-Ioss 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 partic ular, 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 THE POLITICS OF DEFICIT SPENDING 77 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 un less they are restrained by precise rules and reg ulations, 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. 7 The Federal budget is permeated by the no tions and doctrines of "higher" moral objec tives. 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. 0 1. Budget of the United States Government, Fiscal Year 1987, pp.

6e-45. 2. The Wall Street Journal, February 11, 1986, pp. 1, 27. 3. Facts and Figures on Government Finance, 23rd ed. (Wash ington, D.C.: Tax Foundation, Inc., 1986). p. a25. 4. Randall Fitzgerald and Gerald Lipson, Pork Barrel, (Wash ington, D.C.: Cato Institute, 1984). 5. Ibid., p. xviii. 6. Foreword to Pork Barrel, p. viii. 7. Ludwig von Mises, Bureaucracy, 1944 (Cedar Falls, IA: Center for Futures Education, 1983). Needed: A Balanced Budget O ne of the privileges of a rich man is that he can afford to be foolish much longer than a poor man. And this is the situation of the United States. The financial policy of the United States is very bad and is getting worse. Perhaps the United States can afford to be foolish a bit longer than some other countries. . . . Inflation is a policy. And a policy can be changed. Therefore, there is no reason to give in to inflation. If one regards inflation as an evil, then one has to stop inflating. One has to balance the budget of the govern ment. Of course, public opinion must support this; the intellectuals must help the people to understand. Given the support of public opinion, it is certainly possible for the people's elected representatives to abandon the policy of inflation.

- LUDWIG VON MISES Economic Policy IDEAS ON LIBERTY 78 A REVIEWER'S NOTEBOOK The Capitalist Revolution by John Chamberlain I n his The Capitalist Revolution: Fifty Prop ositions About Prosperity, Equality and Liberty (New York: Basic Books, 262 pp., $17.95), sociologist Peter Berger provides his own synoptic review in five pages of his chapter ten. Since the "fifty propositions" are in themselves often redundant, it points to a de ficiency in the Berger method of presentation. Berger has a tendency to labor his analyses. But the good things in his book are practically innumerable. So what if his Proposition One (that "industrial capitalism has generated the greatest productive power in human history") is practically the same as his Proposition Five (that "advanced industrial capitalism has gen erated, and continues to generate, the highest standard of living for large masses of people in human history")? Berger's intention here is to link the past and future tenses of a general proposition, which is certainly helpful, even though the bit about the "large masses" is im plicit in Proposition One. As Isabel Paterson once said, "Standard Oil didn't produce kero sene to pour it down the sink."