2020: A Budget Odyssey

If that same worker were permitted simply to place his payroll taxes in an annuity with a six percent real rate of return, he would have a nest egg worth almost $800,000 (1990 dollars) at retirement age. This would allow the worker to draw a $60,000 benefit per year until death (assumed at age 80). That's about five times higher than what Social Security offers for the same level of investment. ♦ To state this another way: Workers just now entering the labor market will spend half their working years—that is up until the age of 45-paying Social Security taxes and receiving nothing in return for those contributions. Assuming a normal rate of return, a worker could start contributing the amount now paid in Social Security taxes into an annuity at the age of 45 and receive the same type of benefit that Social Security offers for paying into the system more than 20 years earlier.

For today's young workers, then, Social Security isn't generational inequity; it's generational thievery.

Is Doomsday Really on the Horizon?

The analysis above shows what might happen if we leave government on automatic pilot. In reviewing the calculations in this chapter, it is tempting to conclude that surely our elected officials could not be that reckless and irresponsible. They must have the foresight and wisdom to realize that if government gets too much larger than it is today, we could be seriously imperiling our children's economic future. And if the current batch of politicians won't recognize this, then surely we the voters will replace them with intelligent people who do.

Yet there are several reasons to suspect that the nation may disregard these caution signs:

1) Washington's Woeful Recent Fiscal Record. In the first six post-Reagan years, federal spending, taxes, and regulation have already grown by roughly one-third. Under George Bush and Bill Clinton the pace of federal government spending growth has resumed its 1960s and 1970s pace of expansion. In 1990 and again in 1993 the two largest tax increases in American history were enacted by Congress. Figure 1-7 shows projected spending and debt through 1998 under Clinton.

2) The Demographic Time Bomb. Without making major changes and fundamentally restructing entitlements, Congress may not be capable of controlling spending. The reason for this pessimism: The aging of the American workforce. Most of our entitlement spending today is directed toward the elderly. The percentage of the population over the age of 65 and eligible for Social Security and Medicare will double by the middle of the twenty-first century. In the year 2020 the number of Americans over 65 will climb to 40 million, up from about 30 million today. In 1970 there were roughly four workers for every retiree. In 1990 this ratio was three workers per retiree. By 2030, when the baby boomers are all retired, there will be only two workers for every Social Security recipient. By that year the feds will owe the baby boomers an estimated $10 trillion in promised Social Security payments, and perhaps as much in health care benefits.

3) A Government Hostile to Free Enterprise. A strong argument could be made that the most recent Congress was the most hostile to the free enterprise system that ever assembled in Washington. In 1991 and 1992 Congress proposed $8 of new spending for every $1 of spending reductions. Making matters worse, with Bill Clinton in the White House, no longer do taxpayers have a President willing to serve as a goalie guarding the federal treasury— swatting away new expensive and expansive congressional spending proposals. Nobel prize winning economist Milton Friedman was probably accurate when he recently lamented that

"the Clinto

2020: A Budget Odyssey

dministration is far and away the most socialist administration in American history." In sum, our most recent cast of characters in Washington had a strong ideological bias toward spending money, not saving it.

5) A pro-spending bias in the budget process. Politicians vastly prefer playing Santa Claus to playing Scrooge. Unfortunately, the budget rules reward profligate spending, and discourage responsible restraint. The 1990 budget agreement has proven to be a sensational fraud. Meanwhile Congress continues to ignore public demands for genuine budget forms, such as a balanced budget amendment or a tax/spending limitation requirement.

All of these features of the political environment in Washington point to the same depressing conclusion: As things now stand, America is headed toward a twenty-first century with much more government, not less.

The Stages of National Poverty

We do not have to imagine the consequences of allowing government to continue to grow uncontrollably. We know from the lessons of both ancient and recent history that this kind of spending binge inevitably leads to a tragic ending.

Here is a description of how government growth led to the fall of Rome:

The system of bureaucratic despotism, elaborated
finally under Diocletian and Constantine, produced a
tragedy in the truest sense, such as history has seldom
exhibited; in which, by an inexorable fate, the claims of
fanciful omnipotence ended in a humiliating paralysis
of administration; in which determined effort to remedy
social evils only aggravated them until they became un-
endurable; in which the best intentions of the central
power were, generation after generation, mocked and de-
feated by irresistible laws of human nature.

-Samuel Dill, author of Roman Society
in the Last Century of the Western
Empire

2020: A Budget Odyssey

Typically, nations that have traveled the course the ve are now on have undergone a predictable cycle for financing their runaway budgets. The cycle has three stages that should sound familiar:

Stage 1: Tax and Spend. Government spending begins to outpace inflation and incomes. Politicians attempt to pay for the mushrooming government expenses by continuously raising taxes. But they run head-first into an iron law of economics, which is that the higher tax rates are lifted, the less additional revenues they yield. The tax and spend cycle also eventually collides with an iron law of politics: The electorate will tolerate higher taxes only up to a point; then they revolt.

Stage 2: Borrow and Spend. When raising taxes to keep pace with rising expenditures becomes politically futile, politicians turn to borrowing. And borrowing from the public and foreigners is an attractive short-term fix. But lawmakers soon discover that increasingly heavy borrowing imposes its own financial constraints. The debts have to be continuously repaid with interest, which adds to already-voluminous expenditures. This creates a demand for still more revenues, creating a fiscal treadmill whereby the government must run faster and faster just to stay in place. Creditors become increasingly uneasy about the credit worthiness of the government and its commitment to honoring its rising debts. The politicians soon discover that financing government through borrowing is an exercise in frustration-like the greyhounds racing around the dog track, trying to chase the everelusive mechanical rabbit.

Stage 3: Inflate and Spend. With debts piling up and the cost of borrowing rising inexorably, government often turns to its third option to pay for uncontrolled spending: Printing money. This inflation of the currency also carries with it an additional, short-term political benefit for government in that it not only raises revenues, it also reduces the real value of outstanding debt. Historically, however, the inflation spirals out of control and degenerates into hyperinflation. Ultimately the nation begins to either make draconian and painful reductions in public services and benefits, or is dragged into the abyss of complete financial insolvency.

This cycle has run its full course in countless Third World countries. In his best-selling book Bankruptcy 1995, Harry Figgie describes the spiralling debt and resulting hyperinflation in na

2020: A Budget Odyssey

tions such as Argentina, Bolivia, and Brazil. In Argentina, a nation that had gained stature as one of the world's five wealthiest by the end of the first half of the twentieth century, massive public debts gave way to 500 and 600 percent inflation in the mid-1980s. These policies proved financially ruinous for the citizens of Argentina. The nation became so debt-plagued in the 1970s that inflation raged at 1,000 percent and more. Living standards in Argentina plummeted by more than 20 percent in the 1980s. This once-proud economic superpower fell to virtual Third World status by the late 1980s, thanks primarily to irresponsible government spending and lending behavior. It is only now, 15 years after the slide began, that Argentina has abandoned statist policies, and is showing signs of a genuine economic revival.

In America, we are now stuck in stage two of the fiscal cycle of national impoverishment. Through most of this century the government's modus operandi has been "tax and spend." A growing, prosperous nation was able to finance an ever-expanding public sector. Over the past twenty years, however, as the economy has failed to keep pace with government, the emphasis for financing government has been shifted to "borrow and spend."

$100 billion deficits of the 1970s have given way to $200 billion deficits in the 1980s, and now nearly $300 billion deficits in the 1990s. The only real issue is whether we will cut government spending now, or whether we will wait till we enter into the third stage of the poverty cycle, and follow the path of the Argentinas and Brazils of the world.

Recommended Reading

Figgie, Henry, Bankruptcy 1995

Friedman, Milton, "Why Government is the Problem." Hoover Institution, Essays in Public Policy, 1993