The boom in U.S. federal governmment spending since 2001, that is clearly about to go into even higher gear with the Medicaid drugs entitlement and the extension of the Iraq conflict, is nothing short of disgraceful. It is being implemented by people who claim to believe in smaller government, who were voted for on that premise, and it promises to deaden U.S. economic growth for decades ahead.
As documented by the website Economy.com Monday, over the past two years, the federal government has seen the strongest growth in real federal spending since 1985, with real federal spending increasing by 6.3 percent in the year to September 2002 and by another 3.8 percent in the eight months to May 2003. Admittedly, part of this increase is due to higher defense spending, up about 30 percent in 2001-2003, but the real shocker is non-interest, non-defense spending, which was up 10 percent in the year to September 2002, and by a further 6 percent in the eight months to May 2003.
Overall spending growth has been cushioned by lower interest rates, and hence lower interest payments, down 9 percent in the eight months to May 2003. However with interest rates seeming to have bottomed out and even risen somewhat, coupled with a federal budget deficit estimated at $400 billion in the year to September 2003, rising to $500 billion in the following year, federal interest payments are about to make a sharp comeback. Of course, they will be lowered in the short term by the Treasury Department’s refusal to issue 30-year bonds (which Monday yielded 4.76 percent compared to 3.72 percent on 10 year bonds) but over the long term that refusal, stemming from a 2001 decision that was taken because the Federal budget was thought to be in permanent surplus, is one that will come back to haunt the U.S. taxpayer. Not issuing long-term bonds at a time when the Social Security Trust Fund is in year-to-year surplus is likely to lead to much higher interest rates once it moves into structural deficit, around 2017.
As is well known, the politicians in the Bush White House are both powerful and savvy, and from a short term political point of view, this is obviously clever. Give the American public tax cuts, by all means, but let them think they can have at least some of the social programs the Democrats are promising, too. That way, with a bit of luck, they won’t notice the continuing recession and the rising unemployment, and will vote both George W. Bush and a Republican Congress back into office in November 2004. Time enough to worry about the federal deficit in 2005.
This may work for Bush and his political Svengali Karl Rove, who will not have to face the electorate again after 2004, but it is bad policy. If the Treasury Department had a strong leader, experienced in the financial markets, the dangers of this approach would no doubt have been pointed out before the administration committed to it. It was, after all less than ten years ago that President Bill Clinton, with former Goldman Sachs chairman Robert Rubin to guide him, who publicly wished that he could be reincarnated as something truly powerful — the bond market. However, the current Treasury Secretary John Snow, is neither strong nor experienced in the bond market; his principal activity before assuming office was to achieve a truly remarkable remuneration as CEO of a less than successful government-subsidized enterprise, CSX Corporation.
If the House of Representatives had good people, this might not matter; they after all have to face the electorate again after 2004, and presumably have at least some interest in ensuring that the economy remains in decent shape for such trysts. However, while risking being accused of intellectual elitism, I have to say that the key House members have less than stellar intellectual endowments. Speaker Dennis Hastert is a graduate of Wheaton (Illinois) College and Northern Illinois University at DeKalb, Appropriations Committee Chairman Bill Young has a high school diploma, and Budget Committee Jim Nussle is a graduate of Luther College and Drake University, Des Moines.
This is not just a matter of Ivy League (well, Trinity College, Cambridge and Harvard Business School) sneering at those less privileged. After all, one of my favorite Presidents, Ronald Reagan, had an economics degree (class of 1932) from Eureka College, Illinois — and benefited from it too, since the miasma of social democrat Keynesianism, already by 1932 infesting the Ivy League, had not yet penetrated to rural Illinois, so Reagan learned economics properly. But by the 1960s, when the House leadership was getting its education, kids with good grades could get scholarships to top colleges, however underprivileged their background — Bill Clinton, to take a famous example, being a Rhodes Scholar at Oxford University and a graduate of Yale Law School.
To graduate in the 1960s, when college was thought the key to life’s goodies, from such obscure seats of learning, one had to be eccentric, a very late developer or — the most likely possibility — truly not very intelligent. To suppose that all three top Congressmen with public spending authority are eccentric, extreme late developers, heartland Winston Churchills is, shall we say, unlikely. It therefore follows that the latter possibility, sheer lack of gray matter, is most likely the true one.
On the Senate side, things are a little better. Ted Stevens (R-Ak.), chairman of the Senate Appropriations Committee, from an earlier generation, is a graduate of University of California-Los Angeles and Harvard Law School. Even here though Budget Committee chairman Don Nickels (R-Ok.) claims to have “worked his way through Oklahoma State University by starting a janitorial service” — couldn’t he have started a janitorial service at, say, University of Chicago?
The truth is, taxpayer’s money is not in good hands. The administration is interested in spending other people’s money to ensure its re-election, while the House leadership appears unaware of the problems it’s storing up for itself and its successors by running $500 billion deficits. Moreover, it must be remembered that although the electorate likes tax cuts, and the bond market likes balanced budgets, neither the electorate as a whole nor the bond markets have anything like the impact on Congressmen’s campaign funding of the lovers of government spending: lobbyists and special interests. Absent a strong intellectual commitment by the House leadership to low spending or balanced budgets, we’re not going to get them. And as indicated above, these guys are not ones for strong intellectual commitments.
It’s not as if all this spending will even produce economic growth. The federal government’s share in U.S. gross domestic product jumped a full percentage pointing the year to September 2002, will, with the prolonged Iraq conflict, jump another percentage point in the year to September 2003 and looks headed for further rises in the year to September 2004. Meanwhile state and local government spending, which soared in the late 1990s, is being trimmed only modestly in these years of tight budgets, with the main emphasis for closing state budget gaps being on higher taxes. By 2005-6, government’s share of the U.S. economy is likely once again to approach the record set in 1983, and then on current trends to soar well beyond it. This in turn will dampen economic growth; as I have discussed in several earlier articles, the level of government spending and its rate of increase account for more than half the variations in economic growth between countries, according to Organization for Economic Cooperation and Development figures dating back to 1960. The U.S. government is still among the smaller OECD governments in terms of spending as a percentage of GDP, but it’s getting there, and its rate of increase in the last couple of years has been at Franco-German levels. So whatever economic growth the tax cuts bring, the spending increases will in the long run surely take it away again, and more.
Not a pretty picture. In a word, disgraceful. Could the Democrats have done any worse?
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.