RALEIGH – The federal government has no money.
Well, strictly speaking, the federal government has as much money as it wants, because it owns the exclusive right to print U.S. dollars. But that doesn’t mean it possesses real assets or claims on income to back up the dollars it creates. Federal officials can expend real wealth on services or redistribute it to preferred beneficiaries only to the extent that it confiscates that real wealth from the people who originally created it.
Washington can either confiscate the wealth today, by taxation, or confiscate it in the future by borrowing today and paying creditors with future taxes. When it chooses the latter course, real resources are still diverted today from the private to the public sectors as the bonds are sold.
Sorry to have to dumb things down, but at the present moment it is necessary to explain some basic facts in basic language. State and local taxpayers can’t be “bailed out” by federal taxpayers, as the two groups are identical. Taxpayers in some jurisdictions can, indeed, be subsidized by taxpayers in other jurisdictions, but that means there are winners and losers in the game. This is not a beginner’s t-ball league where all the preschoolers get a winner’s trophy.
On balance, the monstrous “stimulus” bill now facing action in the U.S. Senate will compel North Carolinians to subsidize Californians, New Yorkers, and Floridians. I’m told that the projected deficit in North Carolina’s state budget for FY 2009-10 will likely be somewhere around 10 percent to 14 percent of the General Fund. In California, New York, Florida, and several other states, the deficits are projected to exceed 20 percent.
In the short run, of course, a federal bailout of “the states” will really act as a political bailout for all state and local politicians, sparing them the difficult task of bringing spending appetites in line with tax revenues through budget cuts or tax hikes. Federal money will magically appear, the states and localities will plug it into their budget holes, and then future federal tax increases will pay off the debt.
Call it the Immaculate Deception.
In that fantasy world where federal dollars can bail out “the states,” another widely shared delusion is that when asset bubbles burst, creating recessions and exposing excessive debt-to-equity ratios, the interests of individuals and society diverge. Individuals have an incentive to restore their net worth by increase their savings rate, often by paying down debt. But this is said to hurt “society” by reducing demand for goods and services, lengthening and deepening the recession.
Thrift is not a vice. There is no harmful paradox here. As households and businesses pay down debts and increase their holdings of bank deposits and bonds, they increase the pool of funds available to finance new investment, which would create new jobs and economic opportunities. The real problem is that mercurial federal regulatory policies and the prospect of future tax hikes to finance surging deficits are acting as a strong disincentive to new business investment. Governments should be acting more like households rather than trying to borrow their way out of a recession caused by a prior period of easy money and excessive borrowing.
Forget all the talk of spending for spending’s sake, about the “aggregate this” and “aggregate that,” and about the government digging holes to be filled so everyone can be employed. The real economy is about real things, about producing goods and services that people want to purchase and as a consequence creating jobs and returns on investment.
The federal government is not a magical realm – though its leaders are remarkably good at shell games and making things disappear.
Hood is president of the John Locke Foundation