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Press Release

    Government Spending or Taxpayer Relief?

    01/22/2003

    Faced with the daunting task of approving the spending bills for the fiscal year that began last October as well as beginning work on the president’s tax package, the Senate remains locked in debates over federal spending. The President has urged the new majority to pass an omnibus spending bill swiftly for the 2003 budget, but Democrats (and many Republicans) continue to seek opportunities to expand federal spending, which explains some of the hostility towards tax relief. In recent years Congress has developed a healthy appetite for spending, and returning money to taxpayers is like saying no to a second helping of desert.

    The budget showdown provides important insights into the distinctions between the operations of markets and governments. The market is a positive-sum game that thrives on mutually beneficial exchange. Producers compete with one another to provide goods and services to consumers. The competition forces producers to be efficient and continuously strive to meet consumer demand in the most cost effective manner. At the same time, consumers have a wide array of options to choose from in the marketplace, allowing them to spend their money on those products that most accurately meet their needs. When a deal is made, both parties to the exchange are better off—it is a voluntary transaction that both parties enter because they find some benefit.

    These market fundamentals are at the heart of the President’s $674 billion tax plan. Troubled by the slow economic recovery, the administration has announced a series of tax cuts that will provide investors, businesses, and consumers more resources to engage in positive sum economic exchanges. Tax cuts will be made permanent, providing more resources to the private sector. Changes in tax rates will be accelerated, and dividends will only be taxed once, making it easier for businesses to attract capital. The administration estimates that a two-income family of four earning $39,000 will receive a tax savings of $1,100. All told, taxpayers will see relief totaling roughly $98 billion over the next 16 months. These are resources that will not sit idle, they are consumed and invested in ways that expand economic output. That means more jobs, more investing, and more employment.

    Government spending, by contrast, is a zero-sum game. Resources are taken from one individual and given to another; what one person gains, the other loses. Government programs are not a positive sum game that expands the economic pie. Any resources controlled by the government are acquired from elsewhere in the economy, either through taxation or borrowing. Tax dollars collected by the government shift resources from one sector of the economy to another. Which makes even the pettiest budget squabbles more understandable; resource allocation by government necessarily pits interests against one another.

    Spending squabbles were at a minimum as the booming economy generated the increasing revenues that briefly returned the federal budget to surplus. When the economy tightened, however, the picture changed, and Congress’s freewheeling attitude toward spending became a more significant issue. Large spending increases now attracted attention, and Congress had to justify its penchant for spending and balance interests between competing demands for federal money. After September 11, the war on terrorism and homeland security provided suitable cover, with many programs taking on a new air of “security” to justify more expenditures.

    And spending has continued at a significant pace. Since the year 2000, Congress managed to increase federal spending by $782 billion above spending for the previous four years, according to Brian Riedl at the Heritage Foundation. While security may be the excuse, an examination of congressional priorities suggests old-fashioned pork-barrel politics. Spending on the farm program has expanded and the Senate is currently contemplating a bill with supplemental funding of at least $3 billion for agriculture. Across the board, the pressure is on to boost to increase spending, with Congress willing to expand funding for even such poor performers as Amtrak.

    Economic recovery requires policies that expand economic output, not policies that simply pour more money into tired, failing federal programs. The administration’s plan is an aggressive effort to increase economic activity. Congress, however, remains fixated on spending. While income redistribution may be politically lucrative, it offers more distortions than incentives to economic growth. As Congress finalizes the fiscal budget for this year and begins the budgetary process for 2004, it is important not overlook the importance of long-run economic growth in the search for short-term political gains.