"You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we're not bound by that same limitation? We must act today in order to preserve tomorrow."
Ronald Reagan from his First Inaugural Address, 1981
Barack Obama promised during his campaign to "spread the wealth around." Watch out, because the combination of a newly elected Democratic President with an unfettered Democratic Congress will make this promise a reality, even if they have to borrow ever single dollar to do it. Obama's support of the $819 stimulus bill passed by the House last week gives an indication that any sense of fiscal sanity has been thrown to the wind. The bill, if it becomes law, would be the largest in American history. If one wonders where all this profligate spending will lead, a look at the recent state budget history of California is all that is required.
Ten years ago, California Governor Pete Wilson, a Ronald Reagan fiscally conservative Republican (lower taxes, reign in government spending), handed over the state to newly-elected Democratic Governor Gray Davis with a $10 billion surplus. Within the course of four years, Davis and the now liberated Democratic legislature managed to turn that surplus into a $35 billion deficit by 2003, even as most states in the country were experiencing balanced budgets or surpluses. Just to give some perspective, the entire size of California’s budget was $160 billion at that time. During the four years Davis held office, revenues increased by 23%, so why the shortfall? Spending went up 36%. Shamefully the state, which taken by itself is the 8th largest economy in the world, could not balance its books.
The people of California responded by holding a special recall election in the fall of 2003 and throwing Davis out and putting Arnold Schwarzenegger in. (Interestingly, when Ronald Reagan became governor of California in 1967 he had to deal with a major budget deficit left by the previous Democratic governor and legislature combination; and the same scenario played out in 1983 with the election of another Republican governor). Schwarzenegger took immediate steps to staunch the bleeding and borrowed heavily as a stopgap measure, hoping to be able to craft a viable budget with the Democrats for the next fiscal year. He wanted to avoid raising taxes, if at all possible, given the state's business climate already ranked 46th in the nation (according to the non-partisan Tax Foundation) due to high taxes and onerous regulation. Schwarzenegger pointed out that the state had (and has) been losing ten of thousands of manufacturing and service jobs per year over the past decade to neighboring states and overseas. Raising taxes would only exacerbate the situation and actually shrink the tax base further in the long run.
The state received a little reprieve during the next couple of years as the economy of the state, and the nation, picked up, but was still running a significant deficit. During this time, the Democrats refused to implement the deep cuts necessary. Now with the economic slowdown, California finds itself in real trouble again, facing perhaps a $40 billion dollar shortfall this year. This go around the lenders are not lining up to help out either, in fact Moody even downgraded the state’s credit rating for short term loans for the first time in its history. In another first, California just took the drastic measure of announcing that it will delay issuing refund checks to taxpayers by sending IOU's instead. As a friend quipped to me over the weekend, "I guess the state can't say much, if, due to current financial conditions, I send them an IOU for taxes I owe." California also just implemented two day per-month furloughs for state employees and will almost certainly be making other broad cuts in government services (short of a federal government bailout) and increasing taxes yet again to try to close the budget gap: an additional 1% onto the sales tax is what’s being discussed. This increase will mean the sales tax in the state will average around 10%: not good for the business climate.
The moral of this story is clear: if all this financial chaos can befall the world's 8th largest economy because of spending run amuck, is it any stretch to believe the federal government could find itself in the same place a few years from now if we take on at least $2 trillion in new debt during the next two years as the Democrats are proposing? How long will China, Japan, Arab counties and our other lenders continue to fund our debt? There are already rumblings of discontent from China. None-the-less the Democrats want to press on with hundreds of billions in unnecessary spending. The current $819 stimulus bill will actually end up costing over $1 trillion when interest needed to pay it off is factored in. It represents more than the cost of the entire Iraq War from 2003 to present and over $6000 dollars for every American household. Broken down as a cost per the promised 4 million jobs Obama says it will create, that’s over $250,000 per job. The bill includes $200 billion-plus in “tax credits” (read $500/individual and $1000/per family checks from the U.S. Treasury) to most Americans including the 40% who do not pay federal income taxes, $2 billion for child care subsidies, $87 billion for health care, $2.4 billion for carbon capture projects (what’s that?), $1 billion for Amtrak and the bill goes on for 600+ pages.
To give further perspective as to the total amount in play, the federal treasury in its most recent good year in FY 2007 took in a total of $2.57 trillion dollars, and spent $2.73 trillion (a deficit of $162 billion). This year’s deficit is already projected to be over $1 trillion (remember that’s ten 100 billions) and that is before any of the spending in the proposed stimulus bill is included, likely taking the total to $1.5 trillion for the year. In other words, they plan to spend what has been our entire federal budget ($2.7 trillion) and increase it over 50% more! The American public seems to be catching on to just how mammoth and misdirected the current Democratic plan is as well. A Gallup poll taken this week found 37% believe it needs major changes and 17% think is should be rejected outright. In other words a majority of 54% oppose the current bill.
Republicans in Congress point out there is no example in American history when such spending stimulus bills have worked to jumpstart the economy, including last spring when the government issued tax credits of $600/individual and $1200/family to most American taxpayers. Author Burton Folsom points out in his just released book about the New Deal (the granddaddy of government spending stimulus plans) and the Great Depression that the unemployment rate stood at 20% in 1939, which is almost precisely where it was in 1933 when President Franklin Roosevelt took office. Roosevelt's own Treasury Secretary, Henry Morgenthau, testified before a Congressional hearing in the summer of 1939, that the New Deal in terms of creating jobs had been a failure and straddled the nation with twice as much debt in just over six years. That’s because governments don’t truly create jobs and wealth, because they do not build things people want to buy. Governments tax businesses and people and borrow in order to "create" jobs and provide services, often important to the community, but they do not directly create wealth.
If private enterprise creates wealth, the answer to our present crisis is to direct all efforts towards creating a more favorable business climate: tax cuts are what has been the answer in the past. They worked for John Kennedy in the 1960’s, Ronald Reagan in the 1980’s and President Bush in the early to mid-2000’s. Further in order to grant immediate relief and put more money in the economy, the Republicans want to drop the tax rates on those earning $65,000 and under (15% tax bracket to 10% and the 10% to 5%). The amount being withheld from their weekly checks could then be adjusted immediately to reflect their lower tax burden and free up more money for them to spend. Further to turn around the housing market--the genesis of our current economic difficulties--Republicans are calling for granting a $15,000 tax credit to home buyers and government guaranteed loans of around 4% to qualified first time buyers. All this can be accomplished for 100’s of billions less than the Democratic stimulus monstrosity. The proposed GOP Senate plan would cost around $445 billion, half as much the Democrats' bill and, based on previous experience, has a great prospect of working.
California offers a cautionary tale as to what can happen to a wealthy government within a very short time when it spends without restraint. Most agree federal government action must be taken to improve the economy and help people in need of immediate assistance, but the current Democratic bill spends 100's of billions needlessly, while offering little that has actually worked in the past to turn around an economy.
---------------------------------------------------------------------------------------------------
Randy DeSoto is the author of the book We Hold These Truths, which addresses how leaders have appealed to the beliefs found in the Declaration of Independence, throughout our nation's history.