The Consequences Of
Unrestrained Spending
Increased government spending weighs down the economy and requires taxes that hinder working families' ability to make ends meet. A growing economy requires a base level of government spending on defense and justice to enforce the property rights and rule of law necessary for markets to function. Public goods, such as roads, are often important for facilitating trade and aiding economic growth. Yet, they can be difficult for the private sector to provide without at least minimal government oversight. In such cases, limited government involvement can aid economic growth.
Contrary to the fallacy that government spending stimulates the economy, government spending beyond this base level impedes economic growth for three reasons:7
* Diminishing Effectiveness. Governments often begin spending on such necessities as defense, law enforcement, and basic public goods. Empowered by the opportunities for economic growth that these services provide, they mistakenly conclude that they can solve any problem. Consequently, they tend to expand their efforts into services that the market is better equipped to provide, such as education, housing, food, and pensions. With each expansion, the government not only blocks the market from functioning, but also becomes less and less effective itself, until it ultimately becomes a barrier to economic growth.
* Politics. Markets use the profit motive to ensure that resources are allocated efficiently. Businesses seeking profits must consistently respond to consumer demand with quality products at low prices. Governments, by contrast, are monopolies with no real profit motive or incentive to spend money efficiently, so policymakers make re-election their "profit" and consequently allocate resources to even the most wasteful programs if they help ensure their return to office. While innovation and evolving with the changing times are required for businesses to survive, they represent an unnecessary risk for politicians who are guaranteed re-election as long as they do not interrupt the flow of government funds to their districts. Hence, while markets helped the Model T evolve into the Porsche and the Apple IIe into the supercomputer, the federal government continues to run many of the same federal agencies--now obsolete--that it established as far back as the 1800s.
* High Taxes. Increased government spending makes it difficult for working families to make ends meet. Even when the government funds itself by borrowing money, repaying those loans will eventually require higher taxes. Unless lawmakers pare back the $2,500 per household spending increase since 1998, the average household will eventually have $2,500 less per year to spend on necessities such as health insurance, retirement, housing, and education. Regrettably, many people praise government spending on families without acknowledging that families first had to be taxed--and that the burden of those taxes often outweighs the benefits of the government programs.8
In addition to their high cost, taxes hurt the economy by distorting incentives. Families and businesses work, save, and invest because they expect a financial reward. These productive behaviors also make the rest of the nation wealthier by creating additional economic activity. But burdensome tax rates reduce the financial reward for being productive. Consequently, families and businesses cut back their productive behavior to escape taxes, and the entire economy slows down.
To see the consequences of excessive spending and taxation, one need look no further than Western Europe, where politicians have promised to provide for all of their citizens' needs in exchange for higher taxes and bigger government. Western Europeans have incomes 40 percent below Americans' and unemployment rates twice as high. They also pay 50 percent of their income in taxes.
Conclusion
Budgets are about setting priorities. Each day, millions of households find ways to live within their means. All of them would surely like to spend more money than they have; yet, they understand that separating necessities from unaffordable luxuries, even making unpleasant sacrifices, is required to stay out of the red.
Congress and the President have lacked that belt-tightening discipline. As new spending requirements have emerged, they have refused to set priorities and make sacrifices in programs less vital to the national interest. This lack of discipline has raised the cost of government to over $20,000 per household for the first time since World War II. In the absence of re-sponsible spending restraint, the economy will struggle under the weight of excessive taxes and runaway federal spending.
Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
1. Unless otherwise noted, all spending totals are in inflation-adjusted 2003 dollars. Calculations were made using data provided by the Office of Management and Budget and the U.S. Department of the Treasury.
2. These one-year growth rates are in nominal dollars.
3. Spending per household totals were calculated by The Heritage Foundation using Office of Management and Budget data as well as population totals provided by the U.S. Bureau of the Census.
4. These short-term growth rates are in nominal dollars. See Brian M. Riedl, "Most New Spending Since 2001 Unrelated to the War on Terrorism," Heritage Foundation Backgrounder No. 1703, November 13, 2003, at www.heritage.org/Research/Budget/BG1703.cfm.
5. See Brian M. Riedl and William W. Beach, "New Medicare Drug Entitlement's Huge New Tax on Working Americans," Heritage Foundation Backgrounder No. 1673, August 13, 2003, at www.heritage.org/Research/HealthCare/bg1673.cfm.
6. These are called "unreconciled transactions" in the Department of the Treasury's financial reports of the U.S. government.
7. This three-category breakdown of the side effects of government spending is from James Gwartney, Robert Lawson, and Randall Holcombe, "The Size and Functions of Government and Economic Growth," Joint Economic Committee, U.S. House of Representative and U.S. Senate, April 1998.
8. Milton Friedman, winner of the Nobel Prize in economics, has argued persuasively that individuals, because they are spending their own money and not someone else's, have better incentives to spend efficiently than do governments. Consequently, allowing families to spend their own money on items such as education and health care will be more effective than having governments tax these families in order to purchase the services for them.
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