- The Washington Times - Wednesday, March 4, 2009



With a new administration, mounting deficits due to the recession, and looming entitlement costs from baby boomers’ retirements, the calls for entitlement reform are again being raised. However, how reform is achieved is more important than reform itself. There is a basic way to measure success - the higher the proportion of tax increases, the further the outcome will be from reform.

The importance of cutting spending is not simply due to the fact that spending represents the larger threat. The future danger to entitlements, the federal budget, and the American economy is not being posed by falling tax revenues, but the spending explosion accompanying baby boomers’ retirements and the falling number of workers contributing to these pay-as-you-go programs.

Yet even ignoring the disproportionate threat posed by future spending, the current impacts of increased spending and increased taxes are not equal. Their dynamics are inherently different. Spending will increase on its own. With a government apparatus promoting and client constituencies pursuing, assembling successful coalitions to obtain new government spending is relatively easy.

Taxes do not fall on their own accord. Tax cuts first must overcome a government seeking ever more revenue. Second, taxpayers who support lower taxes form a disparate and dispersed group not easily welded together.

Finally, in the case of income taxes, they are also a shrinking proportion of the overall population - the bottom 51 percent of income tax filers pay a negative 2.4 percent of income taxes due to refundable credits.

Nobel laureate economist Milton Friedman long ago recognized the difficulty in taxing a budget into balance. Biographer Lanny Ebenstein quotes him from 1967: “If taxes are raised in order to keep down the deficit, the result is likely to be a higher norm for government spending. Deficits will again mount and the process will be repeated.” It is fiscal equivalent of a dog chasing its tail - if caught, it won’t be long caught - and it will be painful.

From an economic standpoint, this would not matter if government spending were productive. But it is not. Government only appears productive in the absence of private sector competition. That absence of competition is one of government’s two defining characteristics. The other is its lack of the profit motive. Within government’s true and narrow natural parameters, we accept this - we do not want a multiplicity of alternatives when it comes to a money supply, system of justice, police or national defense.

Government is America’s only legally unregulated monopoly. Where there is an absence of competition and profit motive, the relentless incentive to increase productivity is also absent. As much as we may occasionally lament its cost, we demand competition’s effects: ever-increasing productivity, which is the ultimate generator of increased living standards.

Government spending’s final flaw is that it comes at the expense of our most productive resources. Feeding government does not just move resources from the more (private sector) to the less productive area (public sector). It moves them from the private sector’s most productive entities. It does so because these are precisely those able to pay taxes and in a progressive tax system like ours, it moves that much more.

If these assertions seem far-fetched, then just apply one sector’s modus operandi to the other. Government’s goal is to simply grow and its simple yardstick of success is to have grown - as proof, annual increases are factored into its budget baseline. Imagine then a 10 percent cut in it. Such a paring of the federal fingernails would be fought like an amputation. It would be a pitched battle - usually of futility - as every program is “vital.”

Don’t believe it? The last time government spending decreased or stayed the same from one year to the next was 1964-65.

In the private sector, this is routine - today it is happening in multiples of 10 percent. While not welcomed, companies and families perform it without hesitation. The private sector’s goal every day is to cut costs and increase productivity - a way of life, not an anomaly.

A combination of circumstances could finally join necessity of entitlement reform with its possibility. But success is not simply balance but how it is achieved. In this case, “how” is more important than “if.” If it is not done by spending cuts, it will not have been accomplished at all - reform will be as illusory as the balance is temporary. The day of reckoning will merely have been pushed further out and the pain and cost pushed further up.

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001-04 and as a congressional staff member from 1987-2000.

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