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How much government spends is what constitutes the true tax

Sunday, March 31, 2013 - 12:01 am

In a March 7 letter to the editor, Hank Achor argued that the 9 percent approval rating “enjoyed” by Congress is the fault of Milton Friedman. Achor argued that Friedman “declared that the deficits were harmless, and that the true evil was government spending.”

I’ll give Achor partial credit, as he perhaps half understood Friedman. Friedman assuredly believed that government spending was the true evil. Friedman assuredly did not, however, think deficits were harmless. Don’t take my (nor Achor’s) word for it, though. Friedman himself said: “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.”

Again, even though I put it in capital letters, Friedman said IF you can hold down the spending, then you can stop worrying about the debt. He absolutely never said that “the deficits were harmless.”

In later years and in greater detail, Friedman explained that a balanced-budget amendment – one of the items included in the Republican Contract With America – is a means to an end. The end is holding down the growth in (or better, sharply reducing) government spending. The right kind of amendment can contribute to that end; the wrong kind can make it more difficult to achieve.

The key difference is whether the amendment couples the requirement of budget balance with a limit on taxes and, hence, spending. The amendment that passed the Senate by a two-thirds majority in 1982 was the right kind. It provided that total tax receipts were not to increase from one year to the next by a greater percentage than the prior increase in national income. At that limit, spending would remain a constant fraction of income. If taxes (and hence spending) were held below that limit, it would have the ratchet effect of limiting future increases and so make possible a gradual reduction in government spending as a fraction of income. Note that there would not have to be cuts in spending, although that would be preferable.

The limit on taxes would force the achievement of a balanced budget through a reduction in government spending rather than an increase in taxes, unless Congress was willing to resort to the escape clause that required a super-majority to raise taxes above the specified limit.

The balanced-budget amendment sponsored in recent years by Sen. Paul Simon (D-III.) is the wrong kind of amendment. It does not provide any limit on taxes or spending; it simply requires a balanced budget. There is nothing to prevent balance from being achieved by a massive tax increase and nothing to prevent further increases in government spending as long as they were accompanied by higher taxes. Also, it is silent about government mandates, of which more later.

It cannot be emphasized too much that the real burden on the economy is what government spends (or mandates others to spend) rather than how much it receives in taxes.

If total national income is, say, $6 trillion and federal spending is $1.5 trillion that leaves $4.5 trillion for private individuals plus states and local governments to spend. If federal government spending is $2 trillion, that leaves $4 trillion for everybody else. And these statements are true regardless of how the government spending is financed, whether by taxes, borrowing or printing money. The method of finance is important, and affects the level of inflation, interest rates and other important phenomena, but it does not alter the basic real burden on the economy.

So, properly understood, Friedman never said and never suggested by implication that deficit spending doesn’t matter at all. What he was that IF you can hold down government spending as a fraction of our income instead of letting government spending grow compared to our income, THEN the deficits don’t require so much worry.

Achor also went on to argue that the deficits were a result of “Republican anti-tax fanaticism,” apparently implying that Democratic (and Republican) spending was not a problem. A brief review of recent history reveals that the last 80 years (going back as far as FDR) is when spending and meddling at the federal level really began to over take the states. Over those 80 years, Republicans controlled the Senate a mere 16 years and the House of Representatives a mere 20 years. And, those 16 years of Republican control over the Senate overlapped the 20 years of Republican control of the House.

If you factor in the presidency, the Republicans had even less control, as there have only been six years in which there was a Republican president who enjoyed Republican control of the House and Senate. The Republicans never controlled the House even once during the Reagan years. In contrast, the Democrats have enjoyed 50 years of control over both the House and Senate during that period, including 36 years where they controlled both the House, the Senate and the presidency. Clearly, there has been little Republican control. There assuredly has been no libertarian control over this 80-year period.

Spending, largely controlled over this period by the Democratic Party, is the reason we face a $16 trillion deficit. Babbling about libertarians or Friedman simply misses the point — Congress, controlled mostly by Democrats, occasionally by Republicans and never by libertarians, spends far too much and far more than it could ever bring in concurrently with the spending through taxes. It isn’t even possible for the government to tax enough to cover that kind of spending.

To the extent Friedman had any influence at all, it was because Reagan thought so highly of Friedman that Friedman served Reagan as an advisor. When Reagan assumed the presidency in 1981, he immediately put into effect new economic policies founded Friedman’s principles. Four policy objectives, later known as “Reagonomics” were: 1. Reduce the growth of government spending; 2. Reduce the marginal tax rates on income from both labor and capital; 3. Reduce regulation; 4. Reduce inflation by controlling the growth of the money supply.

The goal of these objectives was to increase savings, investment and economic growth while balancing the budget, restoring healthy financial markets and reducing inflation and key interest rates. Reagan obviously did not succeed on the bulk of these goals.

In yet an earlier letter of Aug. 28, Achor blamed Friedman for our fiat currency. Stating the obvious, Friedman was never in control of any portion of either the House, Senate, presidency or the Federal Reserve. Admittedly, very early in his career, Friedman recited the obvious hypothetical benefits of a fiat currency — a fiat currency is less costly than a gold standard, a fiat currency may be less open to inflationary excess (but only if the growth of money supply is held modestly in check), and could be more likely to provide the monetary framework for general economic stability.

But no matter, his opinion was clearly reversed by the time Friedman was selected to serve as an adviser to Reagan. Friedman reversed his opinion on fiat currencies because government simply could not be trusted to follow the restraints required for fiat currency to serve as a supposedly superior paper money system. Friedman regularly quoted a sentence from Irving Fisher’s 1911book, “The Purchasing Power of Money”: “Irredeemable paper money has almost invariably proved a curse to the country employing it.”

While Friedman wasn’t right about everything he preached, he is acknowledged even by Krugman as being a great economist. I’m not sure what substantive differences I might ultimately have, if any, with Achor. His point seemed to be where to place the blame for our deficits, and I do take issue with him there. I believe he needs a few more facts to properly locate the blame for our deficits and our foolish spending. I believe the facts recited above make it very difficult to blame either the libertarians or Friedman. Neither the libertarians nor Friedman spent it. Neither the Libertarians nor Friedman controlled or elected those who did spend it. John Adams wrote, “Democracy never lasts very long. It soon wastes, exhausts and murders itself. There was never a democracy that did not commit suicide.”

Achor seems (and rightly would be) concerned with problems we’ll suffer as a result of our massive deficits. My favorite cartoonist points in the right direction. Remember Walt Kelly’s strip entitled Pogo? “We have met the enemy, and he is us.” Consider the last 80 years. Consider the 17th amendment to our Constitution, which largely eliminated the “Republican” form of government at the federal level. Aren’t our massive deficits pretty much what the majority has asked for?

I’ll end with two of my favorite quotes from Jefferson, the first of which supports Achor’s apparent position with respect to governmental spending and taxation: “I hope a tax will be preferred [to a loan which threatens to saddle us with a perpetual debt], because it will awaken the attention of the people and make reformation and economy the principle of the next election. The frequent recurrence of this chastening operation can alone restrain the propensity of governments to enlarge expense beyond income.”

Thomas Jefferson letter to Albert Gallatin, 1820.

“The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

Thomas Jefferson letter to John Taylor in 1816

Brian Tracey is a resident of Fort Wayne.