Financial weakness is clearly cyclicle in countries that fail to restrain government encroachment into the economy.
Fast growth in government spending discourages private-sector investment and hiring because it means higher future taxes. The result is a financial spiral in which businesses grow less and pay less to their governments. This worsens the fiscal crisis and will create social crisis in many locales as populations age and constituencies fight for their piece of the shrinking pie.
So what’s gone wrong and what can we do about it? It’s easy to blame politicians and their lack of willpower, but that’s utopian. Politicians are often weak-willed and corrupt (as depicted in the new film Lincoln ).
Rules to Restrain Government in U.S. Constitution
One of the critical advances in western civilization was the invention of legal techniques to restrain government. The Magna Carta limited a king’s power and conduct. The Declaration of Independence rejected the overreach of the British government, which had “erected a multitude of new offices and sent hither swarms of officers to harass our people and eat out their substance.” And at the heart of the U.S. Constitution the Bill of Rights strictly limits the powers of the federal government to those delegated to it in the Constitution.
Over time, however, the federal government has expanded its powers dramatically, whether due to lapses in vigilance or the conscious transfer of power. In 1913 the 16th Amendment gave Congress the immense power to tax income but didn’t limit Congress’ ability to borrow against this stream of future revenues. Congress then passed the debt-limit law in 1917 to facilitate debt by ending the cumbersome practice of voting on each debt issue and rollover.
The Need to Restrain Government Spending
Paving the way to our $16 trillion national debt, Congress invented “mandatory” appropriations to fund entitlements. These allowed spending to take place year after year without Congress having to vote on it. This met the letter but not the spirit of the Constitution’s Article I, Section 9, which states that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.” The result has been a pool of unaccountable spending that has grown to over half the annual budget—$2 trillion in 2012 out of $3.5 trillion in total outlays.
In 1974 the new congressional budget process removed the President’s impoundment authority to underspend the budget and established criminal penalties for underspending. Further facilitating government growth, it invented automatic debt-limit increases as part of the House budget and set up congressional voting rules that prevent consideration of the negative-growth impact of higher taxes and bigger government.
In 2009 the Federal Reserve asserted the government’s authority to make large-scale asset purchases even in noncrisis situations. In just four years the Fed has bought $2 trillion in mortgages and government bonds.
The 2010 Dodd-Frank Act invented another powerful expansion technique by placing the Consumer Financial Protection Bureau inside the Federal Reserve. Despite the budget freeze, the CFPB already has 900 employees, is spending at an annual rate of $400 million and, like the Fed, has access to unlimited funding without being subject to appropriations. Similarly, the IMF and most of the World Bank exist outside the U.S. budget, even though their debts are the responsibility of U.S. taxpayers.
The Constitution gave Congress the power to “borrow money on the credit of the United States” At the time this power was self-limiting. Congress had to vote on each debt issue and expenditure, which made it accountable. The government couldn’t borrow much because it couldn’t tax income or wealth, and it couldn’t print money because it was held to the gold standard embedded in the Constitution.
Our constitutional republic is built on rules, not the assumption of goodwill. The rules have been eroded over time and need to be refreshed and strengthened. A good starting point is to create a true debt ceiling that forces spending restraint when debt exceeds the ceiling.