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Thursday, February 23, 2012

Why the Titanic Is Sinking

Washington is now deep into the process of attempting to deal with the budget deficit, an exercise that leaves experienced observers with a sinking feeling. Presenting plans to cut spending and balance the budget is like the proverbial activity of rearranging the deck chairs on the Titanic. It involves a lot of busyness but does not address the real problem.

We’ve been enacting plans to control spending and balance the budget for generations. One of the first efforts was the 1974 Budget and Impoundment Control Act passed in the Nixon administration. Then we had the Gramm-Rudman-Hollings Act, signed into law by President Reagan in 1985. A few years later, in 1994, feisty Republicans took over both houses of Congress and provoked a government shutdown in the crusade for fiscal responsibility.

The lesson of history, then, is that you can’t cut spending by trying to cut spending. It’s a hard point for budget makers to digest, because it seems to defy the rules of arithmetic. Well, when it comes to national budgeting, these rules don’t apply. What matters are the rules of political perception.

Most Americans perceive that government is an effective provider of valuable services. They see it as a super store that supplies education, medical care, retirement income, housing, assistance to the needy, safe drugs, safe foods, scientific research, and so forth. That’s why spending cuts can never be more than temporarily effective. As soon as the specifics of the cutting become apparent, the public will be reminded how very much it likes government programs. As people learn about the autistic child who will be left unassisted, the hospital that will close, and the food inspectors who will be laid off, the public clamors to fund these functions, and the campaign to cut spending falters. We’ve been through this cycle many times.

The lesson is clear: The real cause of red ink is the widespread belief that government programs are effective responses to national needs. If you don’t counter this belief, you can never really cut government spending.

Where does this confidence in government come from? One possible answer is that it is based on reality and that we have numerous careful, unbiased, scientific studies that prove government is a cost-effective provider of services.

There are several difficulties with this position. The first problem is there are no such studies. There are studies that purport to evaluate government programs, but they never include all the overhead costs. By my count, there are 14 overhead costs in the typical government transfer program, seven involving taxation and seven involving disbursement. Such cost-benefit studies as have been done include, at best, only three or four of these costs. Evaluations of government action are shallow and incomplete because the researchers are biased. Before they attempt their study they already believe government action is beneficial. In other words, the cart—the belief that government is effective—comes before the horse—the evidence that it is.

Faith in Government

Historically, too, confidence in government has preceded the evidence that might justify such confidence. The modern faith in government as a problem-solving machine emerged in the late nineteenth century, decades before any interventionist policies had been attempted. For example, in 1888 Edward Bellamy published a hugely successful utopian novella, Looking Backward, which posited a federal government in charge of everything, and solving all problems of poverty, unemployment, old-age assistance, and so on. Bellamy and the thousands who formed “Bellamy Clubs” all around the nation had no way of knowing if government programs in these spheres would be cost-effective solutions. They took it on faith.

The belief in government efficacy is not empirically based. It is the product of illusions. When they first notice government, children tend to see it as a super-parent, an authority figure that has many virtues—including great wealth, foresight, objectivity, and maturity—and is without ugly vices such as selfishness, irresponsibility, callousness, and a tendency to violence. This benign impression forms the basis of the popular view of government. Over time, as the result of actual experience with government, people begin to overcome this naive faith, but in most cases they do not move far beyond the child’s view. They continue to see government as a machine that can fix everything—if only the right people are put in charge. Telling a public with this naive confidence that spending should be cut is like trying to tell a child that a birthday cake should not be eaten: It has no understanding of, or sympathy for, the recommendation.

To restrain spending, therefore, one needs techniques that counteract the mistaken, illusion-based view of government. These measures will not resemble traditional spending reforms. They will not be laws that address the amount of spending. Instead they will address the perceptions underlying spending, since once those attitudes are corrected, the pressure for spending will abate. To illustrate this approach consider the simple idea of reminding people where government money comes from.

The Philanthropic Illusion

One misunderstanding that gives the public a false view of government is the philanthropic illusion. This is the idea that government has money, that it is like a wealthy philanthropist with extra cash to give to needy people and worthy causes. In fact government has no money of its own. The money it spends has to be first taken away from taxpayers, and if you do the arithmetic carefully, tracing out all the indirect and shifted burdens of taxation, you will discover that everyone is a taxpayer. Therefore, to get money for its spending programs, government inflicts privation on everyone, including low-wage workers, college students, the homeless, and so on, and it drains resources from vital activities like technological innovation, medical care, job creation, and so forth.

Under the spell of the philanthropic illusion, politicians and the public downplay or forget the harm and injury of taxation. A simple device that will help counteract this myopia is the “Declaration of Gratitude.” Everyone who receives government money would be required to sign this statement:

“I realize that the funds I am about to receive come from the nation’s taxpayers, and I am grateful for the sacrifices they are making on my behalf.”

Its administration is simple. When you fill out the paperwork for any government grant, subsidy, or payment, you also must sign the statement, whatever the benefit: food stamps, cotton subsidy, small business loan, government paycheck, research grant.

In monetary terms signing this statement doesn’t change anything: Everyone gets whatever government dollars he was going to get. No one can be accused of starving grandma. What it does do is change the psychological climate. It destroys the assumption that government spending harms no one. This frank reality is covered up today. Take the Earned Income Tax Credit. This is a $50 billion welfare program, yet the people receiving this benefit call it a “tax refund” when they get their check. Most of them have no idea that this is a subsidy paid for by taxpayers. Well, if they had to sign the Declaration of Gratitude, they would know.

There is likely to be a lot of resistance to the Declaration of Gratitude idea. Most Americans seem to feel themselves “entitled” to whatever government funds they get and are loath to recognize their dependent status. This entitlement mentality produces the bizarre contradiction of a country with a national debt of $15,000,000,000,000 whose citizens believe they are paying their own way.

But resistance or no, reforms that change the perceptual climate are essential for national economic health. Sound fiscal policy will not be achieved until the public attains a disillusioned view of government.