December 3, 2003
In theory, economics has a lot to say about the size of
government. No resources should be
extracted from the private sector that will not be used for more good in the
public sector. Unfortunately,
measuring public goodness is not so easy.
A famous American document states that government is
instituted to insure inalienable rights. Some
of those rights are listed and most Americans probably agree that the list
should include those as well as others.
Therefore, when someone comes along and wants to see
government so small that it can be drowned in a bath tub, one wonders if those
rights no longer are valid, if government no longer is needed for that purpose,
or if our founding fathers were wrong and government cannot achieve that
If government is the problem, when our heritage indicates
that it can and must be a solution, then one wonders what those running
government have done to create such ill will.
Indeed, the debate should be how to get government back to insuring those
rights, not how to destroy government.
But I no longer want to tarry over the size of government
or the purpose of government. Instead,
I wish to discuss how rather than why resources are extracted from the private
Government has three means of directly extracting resources
from the private sector. We know it
can tax. It can also borrow and a
central government also can print money. In
addition, government uses indirection through regulation and subsidies.
Government also manages resources through government enterprises, such as
water works, post offices, etc.
In other words, government has fees as well as taxes to
allocate the resources it manages.
I firmly believe that the size of government and the
extraction of resources are two separate activities. That is why I always opposed a balanced budget amendment for
the Federal government. When
interest rates are unusually low (doesn't that apply now?) borrowing may be much
preferred to taxing. Low rates
suggest that little damage will be done to the private sector by borrowing while
taxing creates all the distortions contained in the tax system.
Of course, when interest rates are high (and that must be
measured relative to prevailing economic conditions, such as during the mid
1980s), then taxing is a more efficient method of extracting purchasing power
from the private economy. There
also are optimum monetary rules, but I do not wish to get into the policy issues
of the Federal Reserve at this time.
I also will oppose any movement to deny any tax increase at
any time as either simplistic or duplicitous.
Certainly, elected officials should engage in the debate of government's
size and its purpose and not be handicapped by accepting the tax codes as the
maximum tax extraction from the private sector.
A no tax increase pledge is simplistic because it does not
deal with the issues of government that elected officials should debate.
After 9/11, emergency codes have impacted varying costs upon public
safety at even the smallest levels of government.
Many of these governments have limited borrowing power and cannot issue
money. So, should safety codes
dictate how much government activity other than safety should be provided by
There also is a problem concerning what is a tax versus
what is a fee. If transportation
requires more resources to relieve congestion or diminish air quality
deterioration, does it make more sense to use general fund resources (as Georgia
is doing) or additional gasoline fees to meet those concerns? If gasoline fees are taxes and no taxes can be raised, than
the economically most appropriate means of addressing these problems is denied
to Georgia's government.
Only allowing taxes to fall means different things to
different governments. In
Tennessee, where the sustainable revenue growth is so far below the growing
needs of programs that new taxes must be introduced every few years, a no tax
increase pledge means a budget crisis in only a few years. Fortunately, Georgia does not have such a structurally
unsound tax system.
Finally, the duplicity comes in realizing that governments
have unfunded promises that will create conflict with prevailing programs as
those promises mature. In Atlanta,
the promise of healthy infrastructure already is creating conflict with other
programs. At the federal level, the
promises of social security, medicare and Medicaid are not fully funded.
When their needs grow, other programs will need to be cut.
Some conservatives know that, but do not wish to join the painful and politically dangerous discussion of what programs need to be cut. Let's get rid of the simplicity and duplicity of the no tax increase movement and start the debate, long overdue, of what we want from our government and how we are going to pay for it.