FEDERAL SPENDING: MAKE THEM PAY!

1/26/13

In her weekly column in this weekend’s (i.e., Saturday/Sunday, 1/26-1/27/13) Wall Street Journal, Peggy Noonan makes the following statement in arguing against the fiscal policy of Barack Obama and for fiscal prudence:

“Some, especially those who are younger, do not fully understand that what is supporting them is actually coming from other people.   To them, it seems to come from ‘the government,’ the big marble machine far away that prints money.”

Under normal circumstances, Ms. Noonan would be right, as she usually is.   But these aren’t normal circumstances; in the Bush/Obama years, we have fallen down the fiscal policy rabbit hole.

The hole in Ms. Noonan’s argument is, ironically, highlighted in her description of the government’s being, in some people’s perceptions, a machine that “prints money.”   In the modern Bush/Obama approach to fiscal policy, 30 cents of every dollar spent is borrowed.   So nobody is paying for roughly one third of the government services that people are demanding or are otherwise being handed.   One could argue that we are paying the interest on the money borrowed, but, at today’s near historically low interest rates, the interest on the debt is negligible.   Wait until interest rates return to “normal” levels if you want to see truly brobdingnagian deficits, but I digress.

Speaking of low interest rates, they are low because the Fed has aggressively expanded the money supply and targeted interest rates in its never ending crusade against elderly savers in order to reward the spenders and borrowers who got us into the economic miasma from which the experts tell us we are emerging.  The major component of this effort is purchasing treasury and mortgage backed securities with money that the Fed creates almost literally out of thin air.  In fact, the Fed buys roughly ¾ of net treasury borrowing in such a manner.  

So…

We are borrowing about 30 cents of every dollar we spend.   The Fed, in turn, is providing, by money creation, 75 cents of every dollar we borrow.   So what we have is a monetary policy problem perhaps as large as our fiscal problem.  Indeed, the monetary problem is probably larger because without such vigorous and energetic cooperation from the Fed, the government could not borrow, and spend, so much money.

So…

Ms. Noonan, who would be right under normal circumstances, is only partially right in the brave new world of BushObamanomics.  No one is paying for a large measure of the government “services” that are being provided.   We are effectively getting government at a 30% discount.   Nothing drives up demand like discounted prices; no wonder the demand, from all points along the political spectrum, for government continues to grow!

If indeed we want to throttle the growth of government (and yours truly and Peggy Noonan surely do), we should make someone pay for the government we demand.   Then those who have to foot the entire bill might be inspired to offer some spirited resistance to those who demand more and more from government.   No one likes higher taxes, especially yours truly.  But perhaps a balanced budget amendment that would wind up requiring higher taxes when people demand more government might be the most effective means of checking the seemingly never ending expansion of the federal leviathan.  Nothing else has worked.