The Era of Big Government (spending) is back

For much of my early adult life, I witnessed the struggle between fiscal responsibility and the reach of government, particularly at the Federal level. Without a statutory requirement to balance the budget, the temptation to overspend has often overwhelmed rational thought.

For a while, it looked like reason was winning out. Not anymore. We have been on a slippery slope since the 2000s when global wars began to hemorrhage out our national wealth. This was exacerbated by the massive bailouts of the Great Recession. The wheels have now fallen off the cart. Big government and massive spending are back with a vengeance.

The seeds of our problem started with a bastardization of the theories of British economist Robert Keynes. He postulated that short-term government deficit spending during a downturn could spur growth and then be reversed once recovery took hold. Keynesian Economics went well beyond his ideas, abandoning the “short-term” component of the theory, keeping the “spending” part as the primary mechanism by which government could help “create prosperity.” Government funding and the size of government operations go hand-in-hand.

For most of the later part of the 20th Century, there was significant debate about whether the Federal government should try to balance its budget (even though actions have rarely lived up to rhetoric). As the Cold War ended, the so-called “peace dividend” of the early 1990s helped lower government spending and the country experienced a (short) period of budget surpluses. Even Democratic President Bill Clinton acknowledged the diminished role in his 1996 State of the Union Address. He stated, “The era of big government is over.”

This all ended on September 11, 2001. One study estimated that, “Since late 2001, the United States has appropriated and is obligated to spend an estimated $6.4 Trillion through Fiscal Year 2020 in budgetary costs related to and caused by the post-9/11 wars.” These wars also expanded the reach of government through legislation like the Patriot Act which expanded its authority to monitor phone and email communications, collect bank and credit data, and track activity on the Internet. This included domestic activity of American citizens as well as international surveillance.

The Great Recession later that decade further eroded fiscal responsibility. The stimulus and recovery acts of 2008 and 2009 dumped almost $1 Trillion into the US economy. A further $500 billion (net of repayments) was spent to bailout financial institutions. In several cases, the government actually became owners of private companies.

All of this pales in comparison to the spending that has taken place in response to the government-imposed shutdown of the American economy due to COVID-19. The Trump Administration ultimately approved a $900 billion stimulus bill after being vilified for questioning the wasteful spending it included. Subsequently, the Biden Administration approved a $1.9 Trillion stimulus bill. That administration is now preparing an infrastructure bill that will add an additional $3 Trillion in spending.

How did we go from a debate over fiscal responsibility (akin to the requirements of household budgeting) to massive spending without regard for future impact?

The blame rests in the underpinnings of what is called the Modern Monetary Theory. It postulates that government creates new money by using fiscal policy (increased spending). According to advocates, the primary risk is inflation, which can be countered by increasing taxes to reduce the spending capacity of the private sector.

In this model, there is no theoretical limit on government spending and, consequently its role in our society. In effect, it gives a green light for the government to print money without any substantive backing other than the “full faith and credit” of the Federal government. The Biden administration appears to be using the Pandemic to implement such a policy.

We have turned the economy on its head. Rather than business driving prosperity with the government in a (limited) supporting role, the government is now the driver and manipulates the activity of private enterprise to manage the economy. This may not fit the strict definition of socialism (public ownership or control of the means of production), but we are moving radically in the direction of centralized control of the economy.

Sadly, there is no great hue and cry about what we are doing. Anyone who questions the magnitude of government spending or its growth is vilified, as Trump discovered. Even the stock market has jumped on board, making arbitrary gains when (unsustainable) government spending increases.

However, there is a fundamental flaw in the logic. It is predicated on the unshakable belief that our government can pay back (or at least make the monthly payments on) the debt. When people begin to question whether our Federal government can actually meet its obligations things will turn south. If the government ratchets up taxes to curb inflation, it will stifle economic growth. This will leave the government with few tools to right the ship since it spent itself into the crisis in the first place.

At this point, like the “drinking bird” toy that bobs up and down until it keels over, the system will crash in one great motion. Likely, there will be a cascade as investors (in the bond and stock markets) dump securities, not wanting to be the last guy off the boat.

In short, it works right up until it doesn’t. And when it doesn’t, it will be a catastrophe. We have racked up a massive “credit card bill” and left it to future generations to pay.

You may also like...