A Further Perspective

It’s About Reality, Not Austerity

A state cannot run an economy and a state-run economy cannot sustain its state.

By 6.14.12

Today's European debate isn't about governmental austerity, it's about governmental reality. Ultimately, the argument is not whether governments can keep trying to stimulate their economies, but when their creditors will quit financing it. Somehow, Europe's governments, teetering on tilting economies, have missed this point; we can only hope that Washington hasn't.

We are witnessing a prolonged domino-effect among the world's economically intrusive states. It began over two decades ago with the fall of the USSR and communism across Eastern Europe. Now the dominoes are falling into Western Europe -- Greece, Portugal, Spain, and Italy, all are threatened with economic collapse.

By now, the obvious should be axiom: A state cannot run an economy and a state-run economy cannot sustain its state. The more of its economy a government consumes, the less productive its economy becomes. And the more dependent its subpar economy then becomes on its government.

This vicious cycle creates a widening gap between what the government promises and what its economy can deliver. The government resorts to spending more, while its economy responds by producing increasingly less of the revenue needed to finance the government's increasing spending.

The only reconciliation possible between the over-demanding government and its under-producing economy is borrowing. Once this pattern becomes firmly and deeply established, the conclusion becomes inevitable. Political oppression -- as in both former and current communist countries -- can temporarily extend the contradiction, but it cannot extinguish it.

Of course, there are liberals who dispute this scenario -- just as they dispute anything that questions the state's efficacy. They claim that governments can and should do more -- that government spending actually stimulates the economy.

There is no more than a limited truth to this: Simply because of the way that GDP is calculated, government spending can make the official numbers look better… temporarily.

However, over a sustained period, this amounts to merely cooking the books. The problem remains that nagging gap between governmental demand and economic production: someone has to finance what the economy cannot.

Nor are the government's demands static either. Once political promises of increased economic benefits are made, voters demand that they not only be met, but expanded.

Equally important, as crisis looms, the economically interventionist government finds itself less able to address it -- precisely because of its now routine expanded intervention.

In 1930, the year after the Great Depression began, federal spending was 3.4 percent of GDP. By 1936, as FDR and the New Deal faced reelection, federal spending was 10.5 percent -- a threefold increase -- insufficient to end the Depression but still a sizable proportional increase. According to the Congressional Budget Office, over the last 40 years, federal spending has averaged 21 percent of GDP. To proportionally match the New Deal boost, federal spending would need to be over 63 percent of GDP -- a politically and economically impossible figure.

We therefore find ourselves dealing with quantitative, not qualitative differences when it comes to economically intrusive governments. All else being equal, the more intrusive will fall first, yet even in the case of the less intrusive, it is not a question of "if," but "when."

The gap is remorseless and must be financed. Capital is mobile, while the government's clientele is stationary -- if not expanding. The "demand" stays and increases, while the "means" flees to where it is most rewarded and it takes ever increasing borrowing costs to bribe it back.

Over the last four decades, the federal government has averaged spending roughly one-fifth of everything America produces. Over the last three years, it has averaged almost one-quarter -- spending an equivalent of 24.5 percent of America's GDP.

America is approaching a point where it must ask what road it wants to follow.

One is the politically easy, but economically impossible, route of attempted government-induced prosperity. If this is the one chosen, then Washington needs to start arranging its lines of credit quickly. Which should be relatively simple at the moment, since so many lenders now are fleeing Europe's collapsing economies.

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About the Author

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.