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The Budget Battle

Mises Daily: Monday, April 11, 2011 by

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Watching the public debate on the budget, we are reminded of two boys on the floor playing with toys. One has a bear and the other has a dinosaur. They are forever threatening the other kid with taking the toy away. One warns he will take away the dinosaur (military spending) and the other says he will grab the bear (domestic spending). They pull and tug and eventually settle the dispute so long as each gets to keep his favorite.

Oh, and one other thing: both toys belong to other children.

That's the public debate, which should strike anyone as preposterous on its face. If the goal in this crisis is to balance the budget without raising taxes, everything has to be cut regardless of political ideology. But of course that's not what political parties do. The goal of a political party is to shovel the largess in the direction of its constituent supporters while punishing the loyalists of the other party, which is attempting to do the same.

The tit for tat is always resolved the same way: more for both sides — from third parties.

In other words, this is all political play, which is obvious from the numbers and the norms. In the first place, no one is talking about actual cuts, not even the supposedly radical Republicans. These are cuts in projected spending, meaning that everyone is dealing with symbolic changes in a future that is just as symbolic. Even on paper, the only way to consider these cuts is to compare them with the GDP and the national debt — both of which are slated to rise. Forgetting those two metrics, and looking at the actual numbers, there are no cuts at all, only increases.

Even the dating of the Republican's balanced budget is ridiculous. So the budget will be fully balanced in 2040? That's three decades from now. Few of the people in office will still be in office, and many will be dead. To see how viable this is, consider how many political plans of the year 1982 still survive today.

The Republican plan proposes domestic cuts in these gargantuan programs like Social Security and Medicare with nothing specific beyond the old prattle about establishing bipartisan commissions and sending block grants to the states. There is nothing specific here beyond a numbers-laden pipe dream. No programs are abolished, no benefits are slashed or even trimmed, and although the propagandists claim to attack the culture of spending in Washington, there is not one word about taking on the money-printing machine that made the $14 trillion national debt possible in the first place.

The real legislative battle is over current-year spending, and there the Republicans appear to be taking a slightly less profligate line than one might expect, due to pressure from tea-party types. The government might "shut down" unless an agreement is reached, and I hope it happens. It doesn't, of course, mean the end of government as we know it, but it can produce a few days of entertainment.

The Republicans are at least correct on this point: the government's finances are in a state of total calamity, thanks to them and the Democrats. With each shift in the business cycle, we keep going through the same stages, only it gets worse each time. During the boom, tax revenues soar and the president and Congress initiate vast new spending for their interest groups. Then the recession hits and tax revenue plummets, driving up the deficit. But rather than cut back on spending, economists instruct Congress to do what they want to do anyway, spend even more! And so it goes, as we spiral down into the pit.

"The Fed is what makes the whole racket too big to fail."

The only reason this nonsense is sustainable is due to the promise of the Federal Reserve to back all this spending with money creation. The Fed is what makes the whole racket too big to fail. This is why budget battles end up being insignificant to the future of government spending patterns. If the Republicans wanted to seriously take on the fiscal mess, they would begin with reining in the Federal Reserve. Apart from such reforms, budget battles end up being theater.

The time to start paying close attention is when Democrats take on entitlement programs, Republicans propose serious cuts in military spending, and both parties agree on fundamental monetary reform. Until that time, these battles have all the significance of the battle between the two children. Both sides need to return their toys to their proper owners.