Nobody, however, believes that Congress will raise taxes enough to pay for all the spending that is forthcoming, sequestration or no sequestration. Instead, Washington will continue to spend more today while sticking future taxpayers with the bill by borrowing to cover the deficit.
The spendaholics charge ahead because they know they can borrow whatever they need. If Uncle Sam didn’t have the power to tax, it would be considered a lousy credit risk. Taking into consideration over $16 trillion of “official debt,” several trillions more of off-budget indebtedness, and perhaps as much as $200 trillion of unfunded liabilities, the risk premium attached to a borrower with negative net worth and insufficient revenues would result in interest rates far higher than today’s abnormally low rates.
By cramming down interest rates, the Federal Reserve has become the federal spendaholics’ enabler. Like many homeowners during the housing bubble last decade—who paid more for their houses than their income could support, only because creative financing enabled them to “tote the note” for a while—so, too, is the federal government able to borrow enough to avoid its day of reckoning: the universal recognition that it can’t possibly make good on its obligations—because of the Fed’s financial engineering.
Why? Here’s one reason: power. Spending equals power.
All this government spending makes our society poorer, because such spending is “acatalectic” (a fancy economic word that means government spending withdraws scarce economic resources from the free markets and diverts them into the public sector, where they will be directed by political decisions into less-valued uses). The evidence that Big Government leads to economic anemia is overwhelming, whether in the extreme cases of socialistic governments that have commandeered entire economies to democratic interventionist states or where the dose of statist poison is smaller, but the positive correlation between size of government and slowness of economic growth remains.
How can the spendaholics get away with policies that don’t make economic sense? Because they make great political sense. Democrats have seen how Europeans have taken to the streets to protest any and all budget cuts by Europe’s broke governments, and they know that tens of millions of Americans are more concerned about continuing to receive federal benefits today than some potential financial Armageddon tomorrow.
Think of how George W. Bush and a Republican Congress acted like spendaholics when they were in power. This shows how difficult it will be for federal spending ever to be curbed. The fundamental problem isn’t so much partisan as it is systemic. In a democratic system, politicians win elections by doing what attracts the most votes. Since voters like to receive benefits from government, but don’t like to be taxed to pay for all those benefits, all the incentives are for politicians to adopt policies that increase spending faster than revenues.
This will all end badly some day when “the market” asserts itself and sweeps aside the rotten debris of spendaholic policies abetted by a compliant central bank. Until that day, though, the spendaholic binge will continue.