July 30, 2010

Spending Beyond Our Means

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The federal government’s deficit will reach $1.4 trillion this year—a whopping 10 percent of Gross Domestic Product (GDP)—and the total federal debt stands at almost $14 trillion. That’s $40,000 for every citizen of the United States. The U.S. fiscal picture is shaping up to be a category 3 hurricane of red ink. Unless Congress takes action immediately to reduce the deficit, the deficit will inflict devastating damage on our economy.

The reason we are facing a financial hurricane is simple: we spend more than we take in. Nobel Laureate James Buchanan and his colleague Richard Wagner describe the situation this way: To get their jobs, politicians always promise not to raise taxes. To keep their jobs, they direct money back home to their districts and constituents, which means that most politicians favor increased spending over spending reductions.  If they are unconstrained, then, policy makers will always tend to increase spending while avoiding the pain of raising taxes. This behavior leads to systematic deficits.