Chapter XIV: The Cost of Government

So What's Wrong with Big Government?

Taxes at all levels currently consume about $5 trillion out of a $14 trillion economy, or more tan a third of the Gross Domestic Product. The federal budget alone consumes about 20% of the GDP. There are of course great debates about the effects of such large expenditures. Some see it as a drag on the economy; government expenditures, they say, crowd out private investment and thereby slow the economy. If the economy were running at anywhere near full employment of labor and capital, this would be true. But this has seldom been the case; in general, capitalism has proven unable, historically, to maintain full employment for any appreciable length of time. Hence, government expenditures, instead of crowding out investment or demand, have been a significant source of both.

Moreover, the history of American capitalism bears this out. In the period before the Great Depression, the federal budget generally ran 3-5% of the GDP. Since the Second World War, it has run 18-23%. Yet, the economy has been far more stable in this latter period (see Chapter II). So the question is, “Do we really want to cut the budget?” Indeed, we can ask whether capitalism is capable of functioning without such gargantuan government. “Big” capitalism seems to require big government for its proper functioning. But the distributist seeks to do away with both, or at least significantly modify them. And from the distributist perspective, there are at least five problems with such gargantuan government:

1. It encourages political centralization. Governance migrates to the level with the greatest taxing authority, which is the central government. The central authority displaces local government. Thus it is that a senator can boast of putting “cops on the beat,” that is, of acting in place of a mayor or town councilman.

2. It encourages gigantism in business. This happens in two ways. The first is that the regulatory requirements are a great burden for small businesses, but form only a small part of the overhead for large businesses. As the central authority grows, its reporting and regulatory apparatus grows, and this becomes a great barrier to the formation of small businesses, who often have the same requirements as the corporate giants. Small businesses must devote a proportionally larger share of their resources to meeting regulations, and are thus at a disadvantage to large businesses. This becomes a great and often insurmountable obstacle to entrepreneurship. The second reason is that large entities are better at obtaining contracts, subsidies, tax exemptions, and privileges from government. Their very size and scale make them more politically powerful, as they can devote more resources to political and lobbying activities. This converts democracy into an oligarchy of special interests.

3. Governments tend to misallocate resources by reducing their costs, often to zero. Some things should, of course, be treated as common resources, freely available to all who can make use of them. Education, for example, surely falls in that category. But other things are economic resources that should be allocated either purely or mainly by economic means. Such things as “free”-ways and free levees, for example, distort economic incentives and become subsidies which distort the free markets, and favor some groups over others.

4. Such a highly government-dependent economy is not sustainable. As the economy becomes more and more dependent on government stimulus, each round of stimulus must be greater than the last to have even a marginal effect. Eventually, the cost of stimulus must exceed the effects, and the whole system collapses of its own weight. Hence, while the Keynesian system has worked, more or less, for the last 60 years, it may have passed its sell-by date. Indeed, the current crisis of a more-or-less Keynesian economic system might be its last.

5. But the worst effect is that it increases servility and dependence. More and more, we cease to be real citizens and become mere clients of the state, mere employees of the corporation. Our lives are suffocated between these two great powers. Our relationship to the governing authorities (which includes the corporations) becomes a matter of giving as little as we can get away with while demanding as much as we can get. Notions of the common good, notions that are associated with true citizenship, disappear and our political and economic lives are lived entirely at the level of self-interest, a level which can never sustain a community or a nation.

The first four of these problems are violations of solidarity and subsidiarity, and the fifth is a natural result of violating these principles. That is to say, we can have justice in our political and economic lives, or we can have servility, and we have to make a conscious choice. Our choices in this matter are most concretely expressed in government by the size and scope of their budgets, by what we choose to fund and how we choose to fund it. And when expenditures reach the level they have, it is inevitable that the government must reach into every aspect of our lives.

Answers to the current crisis involve spending more and spending it from the top, from Washington and other capitals all over the world. Within the logic of the world economic system for the last 60 years, this makes a lot of sense, it is the “right thing” to do. But at some point, this “right thing” becomes the wrong thing. We have bailed out enterprises because they claim that they are “too big to fail,” but the distributist knows instinctively that they are too big to succeed, at least without government support. The proper response is to break them up into more manageable and more numerous enterprises, any one of which may fail without bringing down the whole system. But this also means that we must attack the basis of their power, which is the centralization of government and the huge revenue base that goes with it and forms such a tempting target.

If we wish to transition from a Keynesian capitalism to a political economy of distributed ownership, we must first reduce the federal budget and the power that goes with it. That is, economic distributism requires a political distributism; power must be redistributed to the lower levels of government and the centralizing (and socialistic) tendencies must be overcome.

Can We Cut the Budget?

The major strategy for cutting the budget since Ronald Reagan has been a “starve the beast” approach, whereby taxes are cut and the resulting fiscal crisis is supposed to force cuts in spending. But clearly this strategy has been counter-productive. It is not really tax-cutting at all, just tax-shifting. The government grows in size and scope, but the costs are shifted to the next generation. This is both immoral and unwise. It is of course immoral to charge our children for services we consume. And indeed, it is only possible because foreign governments have decided to finance our profligacy, an act which guarantees a market for their own goods and gives them increasing influence in American affairs.

The federal budget process itself has been an exercise in despair, for two reasons. One, because most of the expenses are labeled “mandatory,” Congress can only nibble at the edges; and two, whatever the labels, every line item has a lobby all its own, lobbies which combine to kill any real reform. It can only be by a concerted effort of political will that the budget can be cut and power devolve once again on the regions, states, and cities. That political will is not available in the present economic system, because the system itself has been socialized, has become dependent on these expenditures. Thus the problem is that we cannot change the economic system until we decide to change the budget, and we cannot change the budget until we decide to change the economic system.

Distributism becomes the key to this whole process, because it gives us a proven system to work towards and a way to cut the budget. I believe that by using distributist principles, the federal burden can easily be cut by a third to a half over the course of ten years. Moreover, it can be cut without impacting any essential services now provided by the government. This is rather a large claim, and it is therefore necessary to demonstrate exactly what I mean and how distributism helps cut the expense of government.

Cutting the Budget

The 2007 Federal budget came to about $2.86 trillion, a rather large number. To show how it can be seriously reduced, I will address just a few items in the budget. I offer the caveat that the budget is a highly technical work of art, and I do not claim any great skill as a budget analyst.

National Defense

National defense is an intrinsic function of any government; the world being what it is, if the nation cannot be defended it cannot long endure. This function cost us $626 billion in 2007, or about 22% of the entire budget. Indeed, the United States spends almost as much as the rest of the world combined. The actual cost is much higher, because two wars have depleted military equipment that must be replaced, and left us with a large number of wounded who must be cared for. But for all of this money, we have a rather small standing army (although a rather large navy and air force), about 42 brigades, an army that has found it difficult to sustain even small wars without repeated deployments. It would be a mistake, however, to believe that the National Defense budget is all about national defense. It is also about international hegemony—the ability to force our will on the world—and about economic subsidies.

Hegemony turns out to be illusive and expensive, if not downright counter-productive; far from enforcing our will on the world, our presence so far from home is often itself the source of opposition to American policy. The United States has between 700 and 1,000 bases and installations around the world (the exact number is a state secret). The American military is the mainstay of European and Far East defense. This certainly made sense in the years following World War II, when the world was in ruins and the Soviet Union was in an expansive mood. However, Europe and Japan are now rich places, capable of providing for their own defense; it is no longer necessary for them to outsource the job to America, and no longer in our best interest to perform this task. The result is that Americans are taxed to subsidize the defense of our economic competitors. They spend less of their resources in building their own defense and more in building their industries.

But the national defense also serves as an on-going economic stimulus package, one with enormous consequences. This is the “military-industrial complex” that President Eisenhower warned us about in his farewell address. Procurement and research consumed $211 billion of the budget. Often, these are for weapons which the military neither needs nor wants, but are important to lobbyists and politicians. Naturally, we need to constantly replace and upgrade military equipment, but these budgets are so large that they cannot easily be monitored or controlled, and stand as an open invitation to corruption. Indeed, high ranking officers routinely retire to lucrative jobs and directorships with defense contractors, a system that cannot avoid the appearance of pay-offs and institutionalized bribery.

By recalling our army to our shores and investing only in what is needed for a modern army, I believe that we could easily cut a third of the budget while strengthening our real defense. Distributists know instinctively that our best defense lies closest to home, and that billions spent around the world does more to strengthen our enemies and subsidize our competitors. This would save $208 billion and improve our defenses.

International Affairs

There is in the budget $31 billion for international aid and military assistance. This “aid” often goes to prop up military dictatorships and to funding corruption on an international scale. It is not that we who are wealthy should be reluctant to aid those who are poor. Indeed, this is even to our own natural advantage. But all the evidence is that all the aid has retarded development rather than aided it. This will be dealt with more fully in the chapter on globalization and development, but for now, I believe that we can cut $15 billion and do the world and ourselves more good than all this waste will ever do, or ever has done.

Natural Resources

Nearly $34 billion in the budget in labeled “natural resources,” and its major purpose seems to be to turn natural resources into unnatural ones. The Mississippi, for example, is no longer a river but the world's greatest drainage ditch, hemmed in by walls 40 feet or more along its entire length. This is called “flood control,” but in fact in prevents the river from being a river, for one thing that rivers ought do is to flood. It makes sense to protect great cities from these floods, but that task is made more difficult—and less certain—by trying to keep the whole river from ever flooding anything. Floods improve the natural fertility of the soil by adding new deposits of mud and silt. But since the levees are “free” to everyone who wants them, everybody wants them. The costs of levees should be borne primarily by the land made safe by the levee. This is not to say that there should not be some contribution at the national level; the entire nation benefits from the Mississippi. Nevertheless, the control of this river—or any river—should be primarily the responsibility of the communities that border that river. This they could do by inter-state compacts.

When those who bear the costs make the decisions, they are likely to make better decisions. For example, the lower 9^th Ward in New Orleans flooded after hurricane Katrina. But in fact, the Ward is part of the natural floodplain, and would never have been developed, or not developed in the way it was, if the developers had been required to bear the costs of the levees. And this is the story all over. People build their homes in dangerous places, in places prone to fire, flood, hurricane, and earthquake, but take no account of these dangers because someone else bears the cost. Natural systems are perverted into unnatural ones, and natural development is made unnatural by federal subsidies. We could do more for natural resources by spending less, by being unwilling to carry on a war against nature and a program of subsidies. This budget can be cut by $15 billion, and the natural strengthened in the process.

Agriculture

America is believed to have the most efficient agriculture in the world, but if we judge the matter by the amount of subsidies it claims to require, we would have to conclude that it is the least efficient system. The agriculture budget is $23 billion, of which $14 billion is labeled “farm income stabilization.” Now, farming is a hazardous business, one subject to the vicissitudes not only of the market, but of the weather as well. The original idea of these farm programs was to stabilize the “family farm,” but the actual effect has been to replace the family farm with agri-business. It would, and does, consume volumes to detail what is wrong with these programs, but let me first concede that it is important to have crop insurance and similar programs. However, these programs should be primarily supported by the farmers, by the farming states, and by those businesses that have a direct interest in farms, such as feed, fertilizer, and equipment suppliers. Like any other business, a portion of the profits from the good times should be set aside to cover losses in the bad times. It is the farmers themselves who ought to contribute—and control—farm support programs. They are the best ones to judge how much is needed, and when to disperse the funds. The federal budget should have some support for the farmer, since the nation has a direct interest in a stable food supply, but we certainly don't need to be subsidizing tobacco, sugar, and vast oceans of corn syrup. Therefore, the bulk of the funds should come from and be controlled by farmers, who know their own business best of all. It is not unreasonable, therefore, to cut $10 billion from this budget.

Transportation

The transportation budget runs $79 billion dollars. Yet if we follow the sensible principle that costs should always be allocated, insofar as possible, to those who use the services, no budget should be as easy to cut. Indeed, the very problem in our “freeway” system is its name; the roads are not free, but have a high cost. And since the roads are subsidized, the cost isn't being paid, but is being allowed to accumulate for the next generation. That is to say, roads are physical things which deteriorate and have to be rebuilt periodically. They accrue depreciation, in accounting terms. But this depreciation is not being collected. Indeed, very little is collected from a “free” way.

This very freedom distorts the economy. It is really a system of subsidies from the inner city to the suburbs, from populous regions to empty ones, and from future generations to the current ones. Indeed, there are whole industries, such as “big-box” stores like Wal-Mart, whose whole existence is dependent on these subsidies. The very shape of our cities is determined by these subsidies. People move from the inner cities and buy larger homes than they could otherwise afford on cheaper land in remote areas. Initially, they reach these homes over two-lane blacktop back-roads, but as the population builds and the roads clog, they demand that the government give them a road. And not just any road, but a superhighway. Given their growing political strength, they usually get all that they demand. The effect is that the inner core of cities subsidizes the outer core and the remote suburb; people are taxed to support the suburbinization, to support homes that compete with theirs. Cities pay for their own destruction.

The freeways should be replaced by tolls roads, roads capable of collecting their building, maintenance, operational, and replacement costs. At one time there was a good argument against doing this because the cost of collecting the tolls, being very labor-intensive, was very high and caused great bottlenecks in traffic. However, in this day of RFID devices, “toll tags” that automatically measure usage, this argument disappears. What is true of the freeways is true of nearly all the transportation subsidies. This is the easiest system to charge back to the actual users. By financing in this way, we could easily cut $40 billion from the budget, while ensuring that there are always sufficient funds both for road building and replacement.

Education

The Department of Education has a $94 billion budget. The whole department should be abolished. There are 50 departments of education, and the federal government adds nothing to the conversation except another level of bureaucracy.

Interest on the Federal Debt

One often hears complaints about the government “printing” money, but the truth is that almost all of our money is created not by the government but by the banks as “credits” which they create out of thin air. We dealt with this problem in Chapter __, but here I will merely reiterate that it makes no sense to “borrow” the money the banks have created when the public power can simply create that money itself, without interest. Currently, the interest on the federal debt runs $430 billion, a number that will rise rapidly due to the bailouts and stimulus.

The fear is that the government will create too much money and hence cause inflation. While this is a possibility, it would only happen if the money is created for non-productive purposes. So long as there is “slack” in the economy, unused resources, money can be created to utilize those resources. The current federal debt should be monetized over a 10 year period. That is, the bonds should be paid off with created money. This will have some inflationary effect, but not as much as one might think. In the first place, the bonds already are money, although very slow-moving money. Monetizing the debt will convert it to cash, that is, very fast money, which has a greater inflationary effect. However, since the money will be used mostly to buy American goods, it will also have an offsetting expansionary effect.

We cannot continue to live on borrowed money. Even if there is moderate inflation, the debt must be liquidated, and the power to create money must be taken from the banks and returned to the people. And this is not just true for the Federal Government. Indeed, the Feds should serve as low-interest bankers to the states, funding improvements to the infrastructure and educational systems. Since the money is going to productive purposes, it is not likely to be inflationary, and if it is, we know how to control it (issue less money) and who to blame. The present decrepit method of using the Federal Reserve System to control the money supply not only doesn't work very well, it imposes huge costs on the economy, tends to manufacture money for purely speculative bubbles, and exists outside the government and hence beyond democratic control.

Distributism and the Debt

So far, we have identified $812 billion in cuts to the federal budget, or 28%. And we haven't even touched some of the major areas, such as the welfare system, health care, “community development,” research, the social security system, etc. All of these will require major reforms in the near term as they cannot be sustained in their current forms. I am convinced that we can cut at least 50% of the federal budget and actually improve services. The major principle of doing this is always the same: subsidiarity. Expenditures—and the power that goes with them—are relocated to the smallest practical unit of the community. International political ambitions are replaced by real home defense. Costs are, where practical, charged to those who cause the costs.

At this point, however, some critics might note that some of these “cuts” are not cuts at all; they merely relocate expenses to other agencies, such as transportation authorities, levee districts, state budgets, and the like. This critique is absolutely correct. It is not my contention that any of these expenses are not legitimate community functions. Rather, the issue is where to handle these functions, and that will always be at the lowest practical level. Economic distributism requires political distributism, the existence of a diverse set of public powers spread throughout the community. And “power” in this context means the ability to fund things, things like roads and schools and whatever else adds to the common good.

But while political distributism requires that power be dispersed, the dispersal of power itself is dependent on economic distributism. Without reforming the economic system, it will be impossible to reform the political system. The capitalist economy has long been addicted to having a customer and employer as large and as stable as big government, and it is likely that it would collapse without this reliable customer. Before the current era of big government, beginning roughly in the 40's, the economy was in recession 40% of the time; capitalism requires socialism for its very stability. Those of us who reject socialism find that we must also reject capitalism, because the two go together. Therefore, the capitalist system ought to be replaced by a true “free market” system, and that system is distributism, or something very much like it.

Power in government will always follow the funding source. Whatever level of government has the greatest revenue power will also have the greatest political power. When the federal government acquired the right to tax incomes, it became the greatest source of revenue and hence eclipsed all other sources of authority in the social and political orders. Therefore, it is not only necessary to cut the budget, but to relocate the taxing authority. If the requirements of the federal government are only half what they are today, we do not need the current oppressive and intrusive tax structure that we have today. Moreover, if we are truly to distribute power to the lower levels, than these levels must be the primary taxing authorities, with the federal government having only a residual authority. With this in mind, we can now return to the subject of tax reform.