Sunday, December 23, 2012

Taxpayers Lose Interest

Published in The Tennessean, Sunday, December 23, 2012 and at
FORBES with archives.

by Richard J. Grant

November 2012 was an expensive month for Americans in more ways than one. In simple fiscal terms, the U.S. government spent $333.8 billion last month. Half of that was borrowed (government receipts were only $161.7 billion), but November was not an average month. Nevertheless, it was consistent with the bias toward rising government outlays.

The 2012 fiscal year, which ended in September, ran up a deficit of just over $1 trillion. That was not quite a third of the $3.5 trillion that the federal government spent last year. The 2011 fiscal year had a proportionately higher deficit and, at just over $3.6 trillion, the highest level of spending in history. When adjusted for inflation, it roughly ties 2009 for the highest level of real spending.

The extraordinary 18-percent leap in government spending during 2009 was due in part to the addition of new “stimulus” funding as well as spending increases (some of which were automatic) in response to the recession. The $830 billion stimulus package (known formally, if not descriptively, as the American Recovery and Reinvestment Act of 2009) added the equivalent of an extra 3 months’ worth of 2008-level spending spread over the next few years.

The past four years stand out as those with the highest inflation-adjusted spending levels by far. That is in dollar terms, but... 


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter @richardjgrant1

Sunday, December 09, 2012

School Choice And The Advancement Of Society

Published in The Tennessean, Sunday, December 9, 2012 and at FORBES with archives.

by Richard J. Grant

As a society advances, the ability to provide a “safety net” for those who have suffered some type of misfortune increases. But, perhaps paradoxically, that very advancement should also reduce the perceived need for such a safety net.

Advanced societies, which necessarily have relatively well-developed property rights and legal systems, are characterized by rising levels of productivity and income. Over time, the proportion of the population living in poverty, as measured by some objective and absolute standard, should be declining. If that is not the case, or is no longer the case, then it is a sure sign that the protection of property rights is in retreat.

Certainly, as our standards of living rise, our perceptions of what constitutes poverty might also rise. This is why various Western governments currently define poverty relative to some average income and can include families that possess automobiles, color TVs, and air-conditioned homes. Today we grant welfare assistance to families that only a few decades earlier would have been perceived as relatively well-off.

Charity presupposes wealth, and charity best benefits its recipients when thoughtfully provided in a manner that encourages the best characteristics in its beneficiaries. This is why government welfare programs tend to be very poor substitutes for private charity, especially when the funding comes from the more-distant federal level. Further, an entitlement structure creates perverse economic incentives, and political incentives generally cause such programs to expand to unmanageable levels.

Where once people were both encouraged and expected to grow out of poverty and dependency, our “safety net” programs have grown their own constituencies that lobby for their growth and perpetuation. Where once government-run schools were seen as a means to provide the children of indigent families with education and vocational training (as well as to assimilate immigrant families), such tax-funded schools soon became the norm, with many people unable to remember or imagine alternatives.

Just as businesses have great difficulty competing with government-sponsored enterprises that they are taxed to support, the private development and provision of education and training services is also hampered by regulations and tax levies that favor government school systems. With the lure of tax money, government programs tend to create their own ecosystems of politicized constituencies. The coerced nature of tax funding enables those constituencies, not only to crowd out the alternatives of natural society, but also to persist long past any need justified on welfare grounds.

Government-run school systems have run their course from the local control of earlier times to today’s increasingly centralized, politically correct leviathans that give less value for the time of their students and the dollars of their taxpayers than do private competitors. The drain on private resources reduces choice and causes homeschoolers and private-schooled families to pay twice for education. It also traps the children of most lower-income families in an inferior system from which they and their parents would dearly love to escape. The demand for places in charter schools and even in magnet schools attests to this.

The problems inherent in tax-funded schools can be alleviated by greater school choice. If the most important purpose of tax-funded schooling is to assist the indigent, it does not follow that governments should also run the schools. We know that charter schools and private independent schools generally offer better service and will correct their own problems quickly and without politicized battles.

It is disingenuous to argue against the extension of school choice through charter schools and vouchers on the grounds that such schools will not instantly come into existence or that not all areas will be equally served. First we must have the choice. Only then will we be free to innovate and to discover what works best.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter @richardjgrant1

Sunday, December 02, 2012

Who is serious about limiting taxes?

Published at FORBES with archives. A shortened version was published in The Tennessean, Sunday, December 2, 2012.

by Richard J. Grant

The only politicians who are serious about limiting taxes are those who are serious about limiting government spending. Any vote for spending increases is a vote for increased taxes to be paid either now or in the future.

Much of the perceived tax burden can be shifted into the future by deficit spending, which means increased government borrowing. By shifting the perceived burden onto future taxpayers, politicians make their current government spending appear to be less burdensome than it actually is. This illusion is compounded by the belief of many voters that someone else is also bearing the direct cost of current taxes.

Where once there was a stigma against indebtedness, especially to excess, this has broken down over the past century. Politicians, recognizing the value of spending to their reelection chances, welcomed any theory that could be used to justify government borrowing. This helps explain the rapid rise in popularity early in the 20th century of Keynesian theories, which appeared to justify deficit spending at least in times of recession. But once the stigma broke down, budget deficits became common even during good times.

During the past four years, the national debt has increased by more than $1 trillion each year. The total debt has now surpassed $16.3 trillion, which is more than six times greater than annual federal tax revenues. “Stimulus” spending came and never went away. Entitlements continue to grow. The trust funds of both Social Security and Medicare are shrinking, and the reduction in FICA tax rates further depletes Social Security and speeds its transition from mock retirement fund to de facto welfare scheme.

As long as we continue to raise the federal debt ceiling, as we will soon be asked to do, we will perpetuate the illusion that government spending is a low-cost way to fulfill our desires. But as government spending grows, it becomes an increasingly worse deal. As the debt grows, it becomes more expensive to service and increasingly difficult to maintain our AAA rating. As the Federal Reserve continues to monetize half of our annual budget deficit, the dollar will continue to decline in value and the risk of rapidly rising interest rates will increase.

None of this was ameliorated by the recent national election, which left us with a split Congress and a big spender in the White House. Worse, that big spender is also a big regulator. While everyone is in a tizzy over what they call “The Fiscal Cliff,” the prospect of unrelenting regulatory interventions puts us on a permanently lower growth path and weakens our ability to raise the revenues necessary to cover the costs of ambitious government.

In this bigger context, the fiscal cliff is more of a molehill. It consists of the “sequester,” which would reduce future spending increases by about $110 billion per year over nine years, and a more significant set of automatically increased tax rates on incomes, capital gains, and dividends.

Anticipation of at least some higher tax rates has already resulted in income shifting that will, ironically, result in higher tax revenues this year but a relative dearth after higher tax rates come into effect. The sequester would have a barely perceptible effect on government spending except that it will fall disproportionately on defense, which is less than 20 percent of the budget.

A more serious approach to budget control was demonstrated by Sen. Rand Paul, R-Ky., who, on entering the Senate two years ago, introduced a well-crafted bill that would cut $500 billion from the budget over one year. His bill was constitutionally sensitive and therefore friendlier to defense than to the federal departments of Energy and Education. But the admirable feature is that the cuts would occur right now, not at some vague future date.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter @richardjgrant1