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Blupete's Weekly Commentary


July 18th -25th, 1999.

"Government Spending."

Now, let me explode the myth that government spending is good for the economy. The government pipe line leads directly into the pockets of the tax payers of this country, and, nowhere else. If it takes out of your pocket to spend on one of its suggested programs then that is that much less you will have to spend on one of your own personal programs. When government spends, it does not increase the country's wealth by one iota; it but shifts it; from here to there. When we allow government to spend money, we but allow it to spend our money, for government has no money except that which it raises by taxes1; or, which ultimately amounts to the same thing, by borrowing money from the lenders.2

Government has a right to spend the people's money, a right to tax, so to advance the general good, to advance the prosperity of the community; and, to maintain itself so as to achieve these laudable goals.3 It has, no right to spend (to tax) if it goes beyond its constitutional role in our society.4 It is a wonder that we have allowed "the trustees of government" to spend beyond that which they tax in any fiscal period. When government borrows for anything other than a well defined capital project, it likely does so ultra vires, viz., beyond the constitutional power of Government. But, such borrowing by government seems to have bothered few, and certainly has not bothered our politicians.

Debt, for most of us, and certainly for government, is built up on account of a string of expenditures not matched by income. A growing national debt of a country reveals the central difficulty of a country run by politicians who want the pleasure of spending without the pain of paying. The Canadian national debt has systematically been built up, particularly in the last thirty or so years, such that it is now at an astoundingly high level.5 For years I have heard the socialists -- charitable souls who want to spend your money on their projects, but numb-headed when it comes to basic economics -- argue, that government debt is no problem. Who cares if we should collectively owe money, especially if we can do some good with it right now. Well, -- we will put aside, for another day, whether government spending on "social services" has done us, collectively, any good or not (arguably it has done us considerable harm). I here address what large government debt does, as a practical matter, to the spending (taxing) patterns of government. When government borrows money, as is the case for all of us, it borrows money from those who have it. We borrow from those amongst us who own property, and, they expect to get paid back. Further, they expect to receive interest while the loan remains outstanding.6 These propositions will be accepted and understood by most all of us. By running up debt, government correspondingly runs up its operating expenses.7 The higher the debt, the higher the interest. So, government debt, dear reader, translates into a government expenditure, viz., interest. Interest as a percentage of overall government expenditure has run progressively upwards through these years (1965-97) from 12.5% to 26.9% to thus become government's second largest expenditure.8 On the other hand, traditional government areas, those which are clearly in the common good, viz. protection of persons and property (read police protection), health and education have run progressively downwards: 19.7 to 8.2; 5.4 to 4.7; 3.4 to 2.9.

Now, the problem of a large national debt should be completely obvious to the average politician; but, they have done nothing about it. We could put it down to pure stupidity;9 but, what I think we must put it down to, is, political gain, albeit, short term . Arthur Seldon put his finger on it:

"Budget deficits are politically tempting because the economic benefits of government expenditure go to the contemporary citizens, who have votes, and therefore to the politicians of the time, but the cost is borne by voters of the future who cannot vote against the deficits of today. Politicians who are profligate and live on loans today may not be in public life to receive the wrath of voters tomorrow. Little wonder governments often bequeath large debts to their successors."10

Politicians want to raise a certain cheer in the voting population and attempt to do so by making general panegyrics on any number of subjects, and most certainly on the economy, though precious few know anything about the subject. If the politician wants to invite a sure defeat, then he proposes that we should spend less. Every expenditure of public money has some apparent public object and those in support of it, those who are going to receive the public money, will expatiate on that object. "In the great scheme of things, what's a million or two in comparison with this great national interest." Those who are for the expenditure will be found in the halls of power pressing forward their goals. Those who should be critical of it, the suffering taxpayers, are too diffused. Government, the elected bodies of it, should speak out against such expenditure and fully counterbalance the great forces at work to spend more on yet another program or scheme. But the elected body is but a collection of politicians. It is expecting more of human nature than should be expected to think that there will be much resistance to yet a further expenditure.11 While there certainly might be the occasional outstanding exception, it is entirely predictable which way the politician will lean, especially when it is his constituents or friends who will profit by the government outlay. As for the news media: they are always philanthropic. There are no natural checks, though there ought to be; "the people's house soon runs out of the people's money"12 And after we run out of the people's money (the taxes collected in the year of expenditure) they turn to borrowing; and, it ought not to be constitutionally allowed.

_______________________________
FOOTNOTES:

[1] Government can print money; but, that leads to inflation, a general tax on all.

[2] When government borrows to cover the shortfall from current taxes it but throws taxes onto future taxpayers -- an inter-generational transfer, so to speak.

[3] Half baked economists have advanced the theory that government spending will create wealth because of the "multiplier effect." If such an effect exists, it exists equally as well to any spender, be it government or private citizen. The only question is who should spend the first dollar; the suffering taxpayer who earned it, or the government who took it away from him. The sum is exactly the same. It is but simply in different hands. Those who urge government spending, call upon the majority to believe that money in government hands will spend it more liberally or judiciously.

[4] When government gives our money away to a particular interest group; it clearly goes beyond its constitutional role. The constituency of government is the whole of the people, it cannot cater to any of its parts unless it can be clearly shown it is for the benefit of the whole.

[5] And, at that, the government fails to report all of its liabilities. Take, for example, the Canada Pension Plan, an unfunded obligation which certainly should be considered as part of the government debt.

[6] Blackstone defines it: "When money is lent on a contract [the lender expects] to receive an increase by way of compensation for the use; which is generally called interest by those who think it lawful, and usury by those who do not so."

[7] We might wonder what is to happen to all of those who have lived on borrowed money, if interest rates come out of the trough, in which it has been in these past number of years, and zoom up to the rates of 18 %, or so; which many of us will recall from our own memory.

[8] The first largest category, incidently, is "social services" which runs at about 32%.

[9] The politician: "That insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs." (Adam Smith, 1776.) "A politician, where factions run high, is interested not for the whole people, but for his own section of it.." (Macaulay, 1828.) I have made a short note on the political class elsewhere.

[10] Capitalism, pp. 160-1.

[11] Of course we have an official opposition in the house. But the same forces which drive the governing side of the house to spend, work on the opposition in the same manner. Every elected representative is obliged to face the electorate. And, as history clearly demonstrates -- its the spenders who get themselves re-elected. A party who had been in opposition (and as such likely urges further and further government expenditure) and who finds itself in power, next time around, soon comes face to face with economic reality, and, sugar it as they may, must take unpopular steps.

[12] See Bagehot, The English Constitution (Oxford University Press, 1928) at p. 121.

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Peter Landry

July, 1999 (2017)