Government Spending: A Bipartisan Problem

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Nothing is more dangerous to current political discourse than partisan politics. Highly relevant to this hypothesis is the on-going debate over the budget deficit and who, exactly, is to blame for our debt crisis. Republicans will point the finger at the Obama administration, citing the high costs of TARP (neglecting to acknowledge that the first bailout was passed under President Bush), health care reform and the bank bailouts. Democrats will cite reckless spending under the Bush administration, such as the wars in Iraq and Afghanistan, the prescription drug spending package and a skyrocketing homeland security budget.

What is the answer? Both parties are to blame for our fiscal situation.

The graph below demonstrates federal spending in constant dollars. The graph, beginning in the 1960s and ending in 2008, tells a story that has only continued under the current administration. Namely, that government really likes to spend money (and isn’t such a fan of paying for things without borrowing on the future). Democratic congress, Republican congress, divided congress, it doesn’t matter. Federal spending increases regardless of the party in power.

Not convinced? Here is a second graph spanning 200 years that demonstrates trends in government spending as a share of the total economy.

Through the 1920s, government spending as a share of the economy remained relatively stable, and then in the early 1950s it began to skyrocket, regardless of party in power. Why?

Many economic theories exist to help explain this phenomenon. My personal favorite is the idea of “rent-seeking,” or special interest coalitions lobbying for wealth to be transferred to them. Indeed, many programs such as entrenched subsidies (those for the agricultural, renewables and oil & gas industries, among others) and spending programs (Medicare/Medicaid, Social Security, welfare, etc.) did not exist several decades ago, but are now subject to intense lobbying efforts on Capitol Hill.

One proponent of this view is Gordon Tullock, a professor of law and economics at George Mason University who is a pioneer of public choice economics. Public choice theory holds politicians as self-interested agents. Indeed, many pork-barrel spending projects run counter to prevailing sentiment, but are incredibly popular amongst a specific constituency. Once a subsidy or spending policy is implemented, it is incredibly difficult for it to be repealed. Farm subsidies, for instance, can amount to tens of billions of dollars a year in taxpayer funding with little return. Ultimately, the farm bill creates an inefficient, economically wasteful, non-diversified agricultural industry. While repealing it might only save the individual taxpayer a few dollars, these subsidies represent a cash-cow for the industry, and eliminating the subsidy would likely be fought tooth and nail at the federal level. Indeed, with subsidies for bio-fuels set to expire this year, expect that particular industry to flood Washington, D.C. with lobbying efforts for a renewal.

Additionally, conservative economist Thomas Sowell argues in his book Applied Economics that the majority of politicians (and voters) only look at stage one of a given policy. The example he uses is rent control for housing: A rent-control policy is attractive to voters because they believe it means they will pay less for their housing, so they elect a candidate who delivers on this policy. But down the road there is a decreased incentive for developers to build new housing in areas affected by rent controls, leading to housing shortages and ultimately higher costs for renters than originally existed.

The majority of government spending benefits somebody, so until voters begin to think past the initial effects of a policy, they are unlikely to view additional spending as unwise. Government spending is likely to increase indefinitely until we can break ourselves of these irresponsible voting tendencies.

The reality of the situation when it comes to our skyrocketing debt-to-GDP ratio is that both parties participate in a political game where long-term spending mandates are implemented for short-term political gain. The next generation will shoulder an almost unbearable fiscal burden unless young voters demand fiscal accountability from its elected leadership.

Bipartisan Fiscal Reform: Current Solutions on the Table

One proposal put forth by Fred Barnes, editor of The Weekly Standard, is cost-containing reforms to unaffordable government programs. Social Security will be running permanent deficits from 2016 on, according to the Congressional Budget Office. “One reform that could win bipartisan support would, over time, raise the Social Security retirement age to 70…” Barnes said.  “A second reform, bolder and more controversial, would means-test Social Security, gradually slowing the growth of benefits for the more affluent but sparing those with lower incomes.”

Another issue that is generating bipartisan support, notably in California, Illinois and New York, is the public pension crisis, where total federal and state liabilities well-exceed $4 trillion, according to Joshua Rauh of the Northwestern Kellogg School of Management. Many state funds built 8 percent anticipated return rates on investments into their pension funding models--an estimate based on rosy 1990s era economic conditions. In reality, the return has been consistently less, with return rates averaging 4 percent, according to The New York Times.

A third issue is military and defense spending reform. Representatives Barney Frank (D-Mass.), Ron Paul (R-Texas), and Walter Jones (R-N.C.), along with Senator Ron Wyden (D-Ore.) recently sent a letter to the President’s deficit reduction commission urging cuts in military spending. One study, published by the Government Accountability Office, estimates that between 2001 and 2007, 95 defense related programs exceeded cost estimates by almost one-third of a trillion dollars. Likewise, the new defense authorization bill passed by our legislature in May calls for $485 billion for a new engine system for the F-35 Joint Strike Fighter that top Pentagon officials have come out as saying they do not want.

There are numerous opportunities for fiscal reform--far too many to recount in this column. But bipartisan support will be critical if we are to curb the $1 trillion-plus annual budget deficits anticipated for the next several years.

(Source for Figure One: powerlineblog.com ; Source for Figure Two: Library of Economics and Liberty)

(Photo credit: Steve Wampler; C.C. 2.0)

Read more from YPNation on fiscal policy, health care reform and partisan pageantry.