All Commentary
Saturday, March 1, 1997

Balancing the Budget

Stopping Transfer Payments Is Key to Balancing the Budget

It is difficult to deceive other people without their finding out. It is well nigh impossible for politicians to deceive the people who have been beguiled and disappointed innumerable times. Yet, some federal politicos do not easily break the habit. They want us to believe that the annual budget deficits are declining although the national debt continues to soar. According to today’s financial press (January 13, 1997), the federal deficit for this fiscal year is given at $107 billion, and the federal debt at $5.31 trillion, $324 billion higher than last year.

Such deceptions when practiced by bankers and businessmen undoubtedly would be felonious and punishable with fines and imprisonment. In politics, deceit and hypocrisy often are the royal road to success on which political statistics are assembled and propagated.

The politicians who practice this deception are using trust funds, in particular, Social Security revenue, to finance some of the deficits. The small budget deficits they are gloating about merely are the deficits which are not fully covered by trust fund surpluses. The federal government spends more than ever before, but uses trust funds that are set aside for certain purposes. In fiscal year 1997, the Social Security Trust Fund is expected to have surpluses of about $70 billion which the government will spend, leaving only more IOUs. Altogether the federal government has spent some $550 billion of Social Security money. The spenders use these funds to help subsidize agriculture, health and human services, housing and urban development, labor, and numerous other federal activities. But can Social Security be expected to help finance these outlays indefinitely?

The growing federal indebtedness to trust funds is tantamount to growing trust fund surpluses which the intended beneficiaries are itching to spend. Pointing at the surpluses, they are clamoring for ever greater outlays on their behalf which tends to increase federal spending and deficits. The years of trust fund surpluses are followed by years of deficits, which in time raise the specter of trust fund bankruptcy and call for more tax boosts. The chronic fears of Social Security bankruptcy call for ever higher Social Security taxes.

The new angle in federal financing should not surprise us; all administrations since the Great Society of the 1960s readily turned against future generations in order to bolster their own image and popularity. The Balanced Budget Amendment, introduced as S.J.Res.1, which is a big issue of the new Congress, even would sanction the use of trust fund revenue for any spending purpose. Section 7 reads: “Total receipts shall include all receipts of the United States government except those derived from borrowing. Total outlays shall include all outlays of the United States government except for those for repayment of debt principal.” In short, the amendment would permit the spenders to incur trillion-dollar debts to the trust funds, call their budgets “balanced,” and ignore the soaring national debt.

This observation of growing federal indebtedness to trust funds must not be interpreted as a defense of the Social Security system in any form. It constitutes the very cornerstone of the American welfare system on which all other programs rest. it also reveals the poisonous handicraft of politics which seizes income and wealth by majority vote. The Social Security surplus consists of payments by workers recently and presently employed and taxed for the benefit of retirees, most of whom did not contribute a penny to the surplus. Having received many multiples of what they paid in, some aged never tire of demanding their cost-of-living adjustments. In the halls of politics, their voices drown out all calls for reform and warnings of ultimate disaster. Social Security and Medicare always are “off the cutting table.”

You can judge the craftiness of a politician by his or her behavior at the cutting table. You can judge the moral fiber of a political party by the way it vies with others for the votes of the elderly. If Social Security as the oldest, most expensive, and most inequitable transfer system is untouchable, all others following in its footsteps can be expected to stubbornly resist attempts to place them on the table. They merely need to repeat the Social Security rationale and join the transfer coalition to repel the would-be reformers.

To restore a commonplace truth and realism to the transfer system and enhance the prospects for balanced budgets, we must reject all transfer schemes. They breed social conflict and gnaw at the root of democratic institutions. They have made youth the primary beast of burden and victim of transfer; the most monstrous burdens, Social Security and Medicare, have been placed squarely on the shoulders of young people.

Genuine budget control necessitates an early abolition of all political transfer programs. There are several roads that lead back to a free society. One would first lead to genuine privatization of all welfare functions; all social services would be transferred from politicians and bureaucrats to private producers. The privatization of federal health and human services alone would balance the budget.

Another road would lead to a temporary freeze of all transfer expenditures at the present level. Economic expansion together with price inflation would raise tax revenues which, in just a few years, would catch up with the frozen expenditures. The temporary freeze would have to be followed by a permanent freeze of both revenues and expenditures which would shrink the transfer system at the annual rates of inflation. In just a decade or two the inflation would rescind all but a few traces of the welfare state.

On yet another road to fiscal responsibility and stability the welfare system would be made to respect the religious and moral principles of conscientious objectors and allow them to withdraw. It also would grant relief to the primary victims of the system, to young people, and permit them to choose between joining the system or remaining free, independent, and self-reliant. A system which allows its victims to go free is no longer a transfer system.

Despite all the noise about the federal deficits and the Balanced Budget Amendment, there is no indication that the American public and the Congress are serious about the importance of balancing the budget. Public pressures for ever more transfer benefits signal the coming of ever larger deficits.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.