How Capitalism Will Save Us (64 page)

W
hen policy makers anticipate having to raise taxes, they often claim the increase is needed for government’s “investment” in the economy. During his 2008 campaign, then-candidate Obama promised to “invest” in job and antipoverty programs. His administration has since lived up to that promise by raising government spending to a level unprecedented in the nation’s peacetime history. Politicians know that the American public takes a dim view of spending, even if it likes particular programs. So they often substitute the word
investment
for
spending
—one has a good connotation, the other negative.

A case can be made that some government spending qualifies as an investment. In the early days of the republic—even with all the politics involved—government spending on the postal system was seen as a wise investment to speed communications and unite the country. The building of the Erie Canal was an investment that helped make New York City the commercial center of the nation by uniting it with the Great Lakes.

Infrastructure spending that spurs economic growth can also have the characteristics of a private-sector investment. Not only do such projects aid the economy, but people who buy transportation bonds to fund construction of highway projects get a real financial return.

However, government outlays for actual infrastructure projects make up a small portion of the federal budget. More to the point, a private-sector investment, when successful, produces a gain for investors. Investors in equities, for example, get dividends or make a profit on the sale of stock. Unfortunately, what is often billed as a government “investment” rarely produces a gain for the economy. Most often it’s a no-growth proposition. It produces less economic activity—in other words, a loss. That’s because
to underwrite its investment, government has to tax the private sector. It absorbs—some would say “destroys”—capital that would have been used for genuine growth-producing investments. Jobs and businesses that would have been created never come into existence. And some—often many—existing jobs are also destroyed because of the slowing economy.

Even infrastructure projects funded by government borrowing end up destroying capital, because higher taxation can be needed to provide the funds to repay bondholders. True, bondholders get a return—at the expense of capital that is destroyed elsewhere. As we’ve seen from the ongoing scandal over congressional earmarks, most infrastructure projects are hardly as strategic as the Erie Canal. And many are anything but worthy “investments”—such as a $150 million airport that a powerful congressman recently built to help his commute.

Few governments in the last twenty years have “invested” in their economies more than Japan. During the 1990s, the country implemented some ten infrastructure projects. Ronald Utt of the Heritage Foundation recalls,

So what did the Japanese government—and taxpayers—get for their “investment”? According to Utt, after years of relative prosperity, they got a bum deal—a long, downward economic slide that was a net loss.

American fear of Japanese economic muscle has faded considerably since the 1980s. Japan’s nonstop and wasteful government “investments,” building unneeded projects and squandering vital taxpayer capital, produced few gains for the Japanese economy or its taxpayers.

E
ven before the mind-boggling binge spending of the Obama administration, rising government outlays have been a concern. Experts have long warned of the unsustainable tax burden to be created when the Medicare and Social Security programs begin to buckle under the immense cost burden of caring for retiring baby boomers. Within the next decade, some seventy-seven million of them will be drawing on both of these entitlements. Social Security will soon be sending out more in benefits than it takes in from payroll taxes.

The national debt currently stands at more than $10 trillion. Yet the unfunded liabilities of Social Security, Medicare, and Medicaid are more than
$70 trillion
. And that’s before the spending needed to fund the current administration’s new and expanded programs.

The spending of the Obama administration is
in addition
to this entitlement time bomb. When the economic crisis is over, the Congressional
Budget Office calculates that federal spending, as a proportion of the economy, will be about 25 percent higher than in 2007. America has never seen anything like it in peacetime.

That’s only federal spending. There’s also state spending. State politicians are almost as profligate as those in Washington. Before the Obama administration, total government spending—states included—was equal to more than one-third of our gross domestic product. Now it will approach 40 percent.

Additional funding needed by those already-existing entitlements will ratchet our total government spending to breathtaking levels approaching those in economically laggard Western Europe—as high as 50 percent.

And then there’s the huge tax burden that will come if some variation of the Obama administration’s health-care ideas is enacted.

To place all of this in historical perspective, in 1929, when the United States was the largest and most complex economy in the world, the federal government spent only 3 percent of gross domestic product.

What this means for the economy, of course, is that individuals and businesses are likely to face a battery of new and higher taxes. Not only will the 2003 tax cuts be allowed to expire at the end of 2010, but FICA payroll taxes, which cover Medicare and Social Security, will substantially rise, making hiring people more expensive for employers.

Former Treasury Department economist Bruce Bartlett calculates that, based on current government budget projections, “federal income taxes for every taxpayer would have to rise by roughly 81 percent to pay all of the benefits promised by these programs under current law over and above the payroll tax.”
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