Monday, July 25, 2011

The Debt Crisis and the Fiscal Leviathan State by Richard M. Ebeling

The current fiscal crisis that fills the pages of the newspapers and the news shows on television has all been revolving around the issue of raising the government debt limit.


In fact, the present Congressional-approved debt limit of around $14.3 trillion dollars was passed through in June of this year. The U.S. Treasury Department has been merely juggling the books to shift funds and keep spending money. The government has been using tax revenues that it is legally obligated to set aside for federal employee retirement accounts – and which it is supposed to be “put back” at some point when the government formally has the authority to borrow more and get further into debt. It is the type of thing that if done by a private employer to cover his current business expenses would be labeled misappropriation of funds.


Huge numbers are bandied about in the media and among the politicians concerning how much will be cut from future spending as part of a deal to raise the debt limit. Trillions of dollars are to be eliminated from the government’s budgets in the years to come. Of course, most of those spending reductions are to occur later rather than sooner, with little or no specification of exactly what programs would be cut or precisely when.


Furthermore, when both the Democrats and the Republicans propose anywhere from $1.5 trillion to $9 trillion in less spending in future years and decades they never specify what “baseline” is being used to estimate the spending reductions. What really is being proposed in virtually all these alternative plans is a projected decrease in the rate of increase in total government spending. That is, hardly anyone is suggesting that the “slice” of the national economic pie consumed by government through taxing, spending and borrowing actually should be reduced.


“Entitlements” Mean Plunder

Both Democrats and Republicans take it from granted that “Big Government” is here to stay. Even most of those Republicans who emphasize the need for “reforms” in the “entitlement” programs such as Social Security or Medicare do not challenge the idea that these programs are permanently part of the American political landscape. They merely wish to make them more “financially sound,” or “cost efficient,” or managed in ways that would give those eligible for these programs some “choice” in managing their Social Security accounts or in selecting among doctors and medical treatment.


This is, perhaps, most easily appreciated by the fact that scarcely anyone in the Washington political arena challenges the idea and the use of the word “entitlement.” The Merriam-Webster dictionary defines entitlement as “the state or condition of being entitled.” A “right to benefits specified by law or contract” as in “a government program providing benefits to members of a specified group.” It is based upon the idea, the dictionary tells us, of “a belief that one is deserving of or entitled to certain privileges.”


According to the Merriam-Webster dictionary definition, therefore, in the political arena an “entitlement” is a program of benefits that the government provides to a privileged group, a group that comes to believe that it deserves those benefits, and even comes to consider such benefits as their “right.”


The government, however, cannot provide benefits to any privileged group in the society that does not reciprocally obligate others to supply the required resources, goods, or financial means to cover what has been promised. Since government has no supply of resources, goods or sums of money that it does not first tax or borrow from others, any such entitlement compels some other people in society to provide the means necessary for the government to meet its promises to the privileged groups.


That is, one group’s privilege entails a compulsory obligation on others that is imposed and enforced through the government’s police power to tax and garnish the income and wealth of any and all members of society. Thus, society becomes divided into two groups: taxpayers and tax receivers; the unprivileged and the privileged; those who are forced to give up a portion of the production, income and wealth they have honestly earned in the peaceful transactions of the market place and those who have that production, income and wealth transferred to them through the power of the state.


This is, of course, what the famous 19th century French free market economist, Frederic Bastiat, referred to as legalized plunder. The government, instead of acting as a protector and guardian of each individual’s right to his life, liberty and honestly acquired property, becomes the most powerful and intrusive violator of people’s liberty.


The government’s concentrated, monopoly power over the use of physical force is far greater and far more dangerous than even the worst of any private individual or private group that attempts to plunder and abuse innocent individuals in society. But equally important, government is the only user of force in society that widely succeeds in indoctrinating and persuading the large majority of the people under its jurisdictional control that it is “just” and “right” that it plunder one part of the population for the privileged benefit of another portion of society.


Political Rule vs. Individual Self-Rule

In earlier times, governments acquired legitimacy and acquiesce of its subjects by insisting on the divine right of kings. It took many centuries to overthrow the belief that monarchs ruled, regulated, and taxed because of an ordination from God. With the end or weakening of monarchy in the 18th and 19th centuries, a new ruler was ordained with a nearly equally divine political authority to demand obedience from the citizenry – the divine right of “the people.”


Democracy replaced monarchy as the legitimized basis of political power. If “the people” ruled by their own democratic vote, how could they ever tyrannize and plunder themselves? How can a man abuse himself, when his actions are dictated by his own will?


In the United States, the idea of “self rule” originally had a different meaning. It did not primarily or exclusively mean political self-rule through a voting process. It meant the right of each individual to have the freedom to rule over himself. When the American Declaration of Independence spoke of “unalienable rights” possessed by the individual to his life, liberty and pursuit of happiness, the Founding Fathers were saying that each man owns himself, and had the right to live his life as he chooses, as long as he peacefully goes about his chosen business, and respects the equal rights of others to do the same.


The role of government in this uniquely American conception of individual rights and personal self-rule was that of protector and securer of each person’s liberty. The political authority was to be a servant of each sovereign individual, who chooses his own goals and purposes in life and who pursues them with his own mental and physical energies. When he needs the assistance and association of others to attain some of his purposes the method is freedom of choice and voluntary exchange.


Socialism and the Anti-Capitalist Mentality

How, then, did America move away from the idea of sovereign and self-ruling individuals with government limited to a small though essential number of rights-protecting functions, to the notion of the government as itself the sovereign in the name of “the people,” with the individual reduced to the servant who is required and expected to pay any tax and bear any regulation in the name of a “common good” or “national interest,” or “general welfare”?


In a word, the answer is socialism. This year marks the 20th anniversary of the end of the Soviet Union. After the reality of almost 75 years of socialism-in-practice in the Soviet Union and elsewhere around the world, very few people any longer believe in and yearn for dictatorial rule by a Communist Party claiming to know the “inescapable” laws of history; few want to live under a system of comprehensive and all-encompassing socialist central planning. Experience has persuaded enough people around the world that such a system leads to nothing but brutal tyranny, along with economic stagnation and poverty.


While the ideal of Soviet-style socialism and central planning has been rejected and has few explicit adherents nowadays, what does continue to endure and influence general attitudes about political power, economic policy and the role of government in society, both in the United States and around the world, is the socialist critique of capitalism and the free market society.


The rationale for the vast network of government welfare programs as well as regulation and control over private enterprise is based on the socialist analysis of the market economy. When private enterprise is left free, the socialists claimed, the selfish profit motive guides businessmen to act in ways that harm the common good or general welfare. Workers searching for employment will be exploited and abused by greedy employers unless government protects them with workplace rules and regulations, including the establishment of a “fair” wage.


The state must take on the role of paternalistic provider of health care, old age pensions, unemployment insurance, public housing, education, and a wide variety of other social services. Why? First, under unrestrained capitalism workers will not earn enough to provide these necessities for themselves. Second, private enterprises driven by mere self-interest will inevitably fail to supply these goods and services in sufficient quantity and quality.


Individuals, in other words, cannot be trusted to rule over their own lives, to make their own choices, and to interact freely with their fellow men in a society of liberty. Collective control, under the cover of the democratic process, needs to restrain and restrict the individual’s sovereignty in the arena of his own affairs.


In the name of protecting people from such unrestrained capitalism, governments everywhere, including n the United States, have created ever-expanding bureaucracies that regulate nearly every aspect of our lives. As a consequence, our world today is in the grip of a continuing ideology of anti-capitalism. State bureaucracies ruling through anti-market policies have grown into ideological and political elites who arrogantly presume to know and dictate how we should all live and work. Those holding political power may be compared to the nobility of old, before whom the commoners had to grovel so they might live and prosper.


Capitalism as the Liberator of Man

Are these accusations against capitalism and the free society justified? Absolutely not. Indeed, never has an historical record been more twisted and distorted that this socialist critique of the free market society.


Beginning in the 18th century and throughout the 19th century, capitalism and the political philosophy of classical liberalism that accompanied it insisted on the freedom and dignity of the individual. The classical liberals campaigned against and brought about an end to human slavery, first in Europe and then around the rest of the world. These free market liberals called for ending the rule of kings and princes or at least restraining their powers through constitutional government and peaceful elections. It called for impartial rule of law, and the end to torture and other cruel punishments.


The classical liberal and free market agenda included the abolition of all privileges, favors, and subsidies that benefited the aristocracy, as well as the end to all monopolies created by government regulation and protection. It called for free enterprise, freedom of trade and occupation, and freedom of movement. In other words, classical liberalism and capitalism have been an ideology for the liberation of man from political oppression and economic poverty. It has been the foundation for human freedom and material prosperity in the modern world. It has served as the foundation of the American Republic.


Capitalism in the 19th century did not doom the worker to a life of perpetual poverty. Instead, the expanding market economy kept creating new and better-paying employments as the decades went by. It produced the wealth and rising income that resulted in the emergence of a phenomenon completely new to human history: a self-supporting and educated middle class that grew more and more as the lower classes bettered their economic well-being.


Through private investment, capitalism kept raising the productivity of labor to new heights. Parents were able to earn enough so their offspring did not have to join the work force at an early age. This produced something unique in history: childhood, a time when the young could experience the innocence of play and the opportunity of schooling before entering the world of work.


Classical liberalism and the market order fostered the private associations and charitable organizations that enabled the working poor to provide medical care, pensions, and education for their families. Famines disappeared; poverty was dramatically and continuously reduced; and hard and long hours of work were slowly but surely eased and shortened to a degree never before experienced. Capitalism has been the liberator of mankind. The great history and glorious achievements of that earlier free market capitalist epoch must be relearned once again in a society that knows little of the system that has provided the comfort and standard of living that too many of our fellow countrymen take for granted.


The Dangerous Growth of Government

For more than a hundred years, now, the anti-capitalist mentality has undermined the original American political philosophy of individual rights and economic liberty. In its place has grown a politics of paternalism and dependency. This has easily played into the hands of those who have desired political power under the umbrella of democracy, and by those who have desired and now believe that they have an entitlement – a “right” – to redistributive largess because they cannot imagine life without those government “safety nets” and who believe that a free market, limited government world would be cruel, uncaring, and inhumane to them and others.


In 1902, government spending in the United States as a percentage of Gross Domestic Product (GDP) was only slightly more than 7 percent. In 1930, before the massive growth in the size and reach of government during the Great Depression and Franklin Roosevelt’s New Deal, government spending as a percentage of GDP was only a bit more than 10 percent. In other words, just 75 years ago, 90 percent of the valued production of the U.S. economy was used and spent in the private sector.


Today, government in America spends over 40 percent of the country’s GDP, the private sector uses and consumes only 60 percent of the economy’s valued output. The government’s share over this 75-year period has increased four-fold, and the private sector’s use of its own produced and valued output has decreased by 30 percent over this period.


Federal government spending in 2010 was $3.4 trillion. In 1930, the Federal government spent $156.7 billion (in 2010 dollars). Thus, government spending today is 22 times more than it was 75 years ago. In 2010, Federal government tax revenues were $2.16 trillion. In 1930, the Federal government collected $176 billion in taxes (in 2010 dollars). Government taxes collected is 12 times larger today than in 1930.


What explains the difference in the growth in government spending versus the growth in taxes collected by the U.S. government: the Federal government’s deficit spending. In 1980, the accumulated Federal debt (in 2010 dollars) was around $3 trillion. In 2001, it had increased to around $7 trillion (in 2010 dollars). Today, Uncle Sam’s debt is over $14.4 trillion, more than double what it was ten years ago. In 1980, the government’s debt amounted to less than 30 percent of GDP; today, it is rapidly approaching 100 percent of U.S. gross domestic product.


America’s Unwritten Fiscal Constitution

Through most of the first 150 years of U.S. history, the federal government abided by what Nobel Economist, James Buchanan, called America’s “unwritten fiscal constitution.” There is nothing in the U.S. Constitution that requires the government to balance its budget. But during that first century and half the fiscal rule was that the government should limit its spending to the narrow functions spelled out in the Constitution, and should not burden current and future generations with a debt due to deficit expenditures in the past. If an emergency, such as war, were to make it necessary for the government to borrow to cover unexpected and immediate higher spending, that government should run budget surpluses when the emergency had passed to pay off that debt. It should then return to the balanced budget rule.


The free market economists of the 19th century understood that when any government expenditure must have a matching tax attached to it, the citizenry knows directly and in full what any proposed government program will and must cost. Any extravagant proposals for more and bigger government spending, carries with it, under a balanced budget, clear and explicit information for the citizens and the voters about what and whose taxes will have to be raised and by how much.


Voters may still support such an increase in government spending, but there is no way to hide from them what the cost will be in terms of less money and wealth in their pockets because taxes will have to be raised to cover the expenses of the expanded government largess. The unwritten fiscal constitution of a balanced budget rule served as an imperfect, but nonetheless effective constraint on growth in government for a good part of American history.


Keynesian Economics and Deficit Spending

The balanced budget rule was thrown to the wind beginning in the 1930s. A major influence in bringing this about was the Keynesian Revolution in economic theory and policy. Named after John Maynard Keynes who first formulated this new theory in his 1936 book, The General Theory of Employment, Interest, and Money, it was argued that a market economy is inherently unstable and susceptible to wide and prolonged fluctuations in employment and production. The remedy was for government to run budget deficits during times of recession or depression to boost spending and recovery in the economy, and run budget surpluses during boom times to dampen inflationary tendencies and pay off or reduce any accumulated debt.


Rather than balance the budget annually, the Keynesians said the budget should be balanced over the business cycle, with wise and far-sighted government policy makers using their theories to manage and manipulate government spending, taxing and borrowing to maintain full employment, economic stability, and long-term economic growth. There was a high degree of arrogance and pretense among these Keynesian economists that they had discovered and could successfully implement a “holy grail” of economic salvation against the uncertainties and vicissitudes of much of everyday economic life.


But while the Keynesians dreamed dreams of mastering and manipulating the market economy through the miracles of “activist” monetary and fiscal policy, ordinary politicians looking for ways to get elected and reelected, found in the Keynesian Revolution their own miracle.


Here was a way to offer their constituents something for nothing. In the name of “creating jobs,” fostering economic growth, and supporting a business cycle-free economy, they could offer seemingly unending spending with no need to attach a tax bill for what was being promised to voters.


More welfare redistribution; more public housing; bigger spending on public education; increased funds for the arts or scientific research for the lucky recipients of government grants; larger subsidies for selected groups of producers in the political candidate’s electoral district; expanded government bureaucracies to regulate and control various aspects of commercial and business life to benefit various special interest groups trying to manipulate the market more to their own advantage through government power.


The possibilities seemed endless, and all with a taxpayer price tag far smaller than the actual cost for all the wondrous spending that was offered to growing segments of the society. Indeed, those politicians could not have done it, if the constraint had not been lifted on government’s ability to borrow and spend.


Government deficit spending has opened a Pandora’s box of political pandering and plundering. Those who are promised government expenditures, programs, and various other benefits receive them in the present and over a period of time leading up to the next election that the politicians who have supplied these political goodies are hoping to win.


The Costs of Borrowed Money

The full cost of funding them only emerges over many years or decades, as the annual deficits add to the accumulating debt, with the resulting interest and periodic principle payments coming due. Currently, the United States government is borrowing around 40 cents of every dollar that it is spending. Taxpayers do not feel the direct and immediate impact of the deficits, since they are not being taxed enough to cover that 40 percent of those government’s expenditures.


It should be pointed out and not forgotten, however, that the citizenry does pay a price in the present for the deficits that the government is running. The government may not tax the full amount needed to cover its total outlays but to have the funds to cover the remainder of its expenditures it must borrow the difference. That deficit-funding gap recently has equaled a trillion dollars or more a year.


Every dollar borrowed by government, and the real resources that sum of money represents in buying power in the marketplace, are part of the society’s scarce means of production not available for private sector use. There is one dollar less of real resources available for private sector investment and capital formation, private sector technological research and development, or private sector expansion of output and job creation.


The costs of funding the deficits and the accumulated debt are costs not only on future taxpayers. They are costs on the current population who are that much poorer and who leave that much less wealth and productive capability to the next generation, because it has been taken out of the hands of private enterprise to instead cover the government’s present-day giveaways.


From Limited to Big Government

What enabled America’s earlier unwritten fiscal constitution to work in the 19th and early 20th centuries clearly was not because it was written in stone – because it was not. It was followed because it was generally considered to be the “right thing to do.” And it was considered the right thing to do, because it was part of a set of political and economic ideas based on the belief that governments were not supposed to give various special interest groups financial and regulatory favors and privileges at the expense of other members of society.


The practice of limited government meant limited government spending. There was no need to try to hide what government was costing, when what the government spent money on was, for the most part, the few enumerated functions assigned to the Federal government under the Constitution.


When the World Almanac was first published in 1869, all of the offices and activities of the Federal government literally fit on one page; and half of that single page was filled with the names of U.S. ambassadors to foreign countries. Today, if you pick up a copy of the World Almanac, you will find that the offices, bureaus, departments, and agencies of the Federal government take up several pages with hundreds of entries in very small print.


Big Government has brought with it a big and growing debt because the entitlement society, the redistributive society, the political plundering society has no limit once government is viewed as paternalistic provider rather than an essential but more modest protector of each individual’s life, liberty and property.


No deals in Washington, D.C. among the political culprits, whose interactions with special interest groups have created and maintain the Fiscal Leviathan State, will solve America’s debt and deficits problem. What we need is a change in the ideas and beliefs among many of our fellow citizens. As long as too many of our fellow Americans believe they are “entitled” to the income, wealth and productions of others, and as long as so many of our fellow Americans accept either through ignorance or guilt that they have an obligation to be taxed, regulated and plundered to fulfill those entitlements little change can or will happen to radically shift the direction we are moving in.


Making the Moral Case for Liberty

Another way of saying this is that we must reawaken the moral case for liberty. The starting point for such a moral reawakening is the rejection of the collectivist conception of man and society. Collectivists of all types—socialists, communists, fascists, interventionists, and welfare statists—presume that the group, the tribe, the “nation,” or the social “class” takes precedence over the individual. He is to serve and if necessary sacrificed for the “common good” or “general welfare,” since the individual has neither existence nor “rights” separate from the collective to which he belongs.


Compare this with the unique and starkly different philosophy of man and society captured in the American Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”


Rights precede government, and are not something given to man by any political authority. Each of us possesses rights that may not be taken away or undermined by those in political power. We all possess an inalienable right to our life, liberty, and property. We own ourselves, and by extension we have a property right to what our creative minds and efforts have peacefully produced. We may not be enslaved, sacrificed, or plundered by others, whether they are private individuals or organized governments.


The individual, not some mythical collective, is the center and starting point of society. The free market is the arena in which people form relationships for mutual benefit on the basis of voluntary exchange. The free man finds his own meaning for life, guided by the philosophy or faith of his choice. He refuses to coercively impose his will on others, just as others may not use force against him. He persuades others to live and act differently through reason and example, and not with the bullet or the bayonet. And no political authority can make claims against his life, liberty, and honestly acquired property, because the function of a limited government is to secure his freedom from predators and plunder.


This is the philosophy of individualism and capitalism that must be reawakened in our fellow men if we are to free our society from the stranglehold of Big Government and its ocean of debt. It requires a confident belief that we are right, that both reason and history have demonstrated the value and benevolent results of what Adam Smith once called “the system of natural liberty.”


The Importance of the Battle of Ideas

Such an appeal to a battle of political and economic ideas may seem unrealistic or irrelevant given the urgency of our political and fiscal problems. But the social political and economic crises of our time are the outcome of an earlier battle of ideas that the enemies of freedom and capitalism succeeded in winning to a great extent. They indicted the society of liberty; they distorted the reality of capitalism and its brilliant triumphs in freeing man from poverty; and they imbedded in the minds of many the conception of political entitlements that serve the power ends of political paternalists and which requires the plundering of the peaceful and productive members of society.


There is fiscal crisis – the Western world in reaching the limits of how far it can live on borrowed money, and based on unrealistic promises and immoral premises. Our society is living under a paternalistic and plundering political system that threatens to bring its productive potentials to a halt. And in the extreme, it could lead to a situation of capital consumption, under which the government’s taxing, spending, and borrowing policies take so much away from the private sector that it becomes impossible for private enterprises to maintain the productive capacity upon which our standard of living is dependent. Civilizations have regressed in the past. And it can happen again.


Whether the final phase of the fiscal crisis of the government’s redistributive and entitlement system is reached next year, or in two years, or in five years, the question then will be, what will follow the failure and collapse of the Fiscal Leviathan State? Our society will stand at a crossroads. And when that time comes it is essential that there are enough people who understand, can explain, and are willing to defend the ideas and ideals of individual rights, economic liberty, and the free market system. If not, the future may see a tragic return to a less civilized and much poorer past.

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