Democracy and Power 104: Future Debt Burden
A government debt is a government claim against personal income and private property – an unpaid tax bill. —Hans F. Sennholz
Stop Excessive Government Spending – Now!
Nobel Laureate Milton Friedman was a great economist. Friedman was also a great observer of the political process – particularly the American scene. Friedman knew that excessive taxes destroyed innovation, personal freedom and economic growth. And, Friedman knew that in order for American to stay great, government spending must be a small fraction of the annual Gross Domestic Product (GDP). Without a doubt, what government spends will ultimately be paid in taxes, increase infllation (which reduces the wealth of everyone) or creaete more debt (which must be paid by confiscating the income or wealth of our children). Friedman knew that spending had to limited and controlled:
Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.
Unfortunately, America must worry about our debt. It’s extraordinarily dangerous. Bush II was a prolific spender and America’s debt exploded. Over the past four years, during the Obama reign, our federal government has borrowed 40 cents for every dollar spent. Obama, in four years, has increased the debt by 5 trillion dollars, bringing our total debt to 16 trillion dollars. Again, government debt is an unpaid tax bill and must be paid by confiscating money from future workers or from private property.
Excessive government spending/debt is the issue of our time in almost every popularly elected government – Europe and the United States. Government spending plagues Greece, California, Ireland, Illinois, San Bernandino, Harrisburg, the United States of America and nearly every democracy.
Nothing is more important than stopping the insane excessive spending of our government. If our excessive spending is not limited, our children will most likely experience a continuted, anemic, economic growth ending in a terrible, economic distablization. California, Greece, San Bernandio and other jurisdictions are small in comparison to what will eventually occur in America. Again, before the spending/debt tsunami destroys us, America will bumble along with anemic economic growth and high unemployment.
We have many opportunities to control our spending/debt fiasco. Presently, two competently administered and economically vibrant countries have effectively limited government spending/debt to a percentage of Gross Domestic Product. Poland has the fastest growing economy in Europe and constitutionally limited government debt to 60% of GDP. [Read: Does America Need a Constitutionally Defined Debt Limit? ]
Similarly, Switerzerland has limited government spending in relationship to their GDP. Notice, Poland limited their debt to their GDP, while Switerzerland limited spending in relationship to their GDP. Both practices stopped excessive spending in relationship to revenues. Switzerland limits spending to be no higher than the trendline of revenue over a defined period of time. Dan Mitchell of the Cato Institute explains Switzerland’s “debt brake” in the Wall Street Journal:
The Swiss debt brake does not require a balanced budget in the traditional sense. Tax receipts, as we know from the American experience, tend to increase rapidly when the economy is doing well and fall off when the economy stumbles. To smooth out the ups and downs, Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance).
Additionally, Switzerland law stops politicians from arbitrarily increasing tax. Any new tax increase must be approved by the majority in the nation and a majority of the cantons. Again, Mitchell reports:
The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.
Poland has a constitutional limit on the ratio of government debt to GDP. When debt exceeds 60% of GDP, spending must be reduced, taxes rates increased or a combination thereof. Switerzerland uses the “debt brake” to limit spending as it is related to a trend line on revenues. Additionally, Switerzerland made it difficult to raise taxes.
The important lesson for America is that excessive spending becomes dangerous debt, which must be paid for by our children and grandchildren. Poland and Switerzerland imposed binding restraints, which stopped excessive spending and fostered vibrant, economic growth.
With the next debt ceiling decision is immediately upon us, it is time for We the People to demand binding limitations on excessive spending. For over a year, FreedomWorks has supported Cut, Cap and Balance, which caps spending at 18% of GDP and requires a balanced budget. An alternative approach could be similar to Poland and force government debt to a GDP ratio below 60% of GDP.
Absolutely essential is binding restraints on spending. As Milton Friedman observed, spending is really taxing:
The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income (GDP), and if you do that, you can stop worrying about the debt.