Government Spending and its Consequences

by

This U.S. Citizen

Why is government spending and a large deficit so
bad for America? I think many people hear these words
and this question but may not really understand the
implication of high spending and bloated deficit
spending. I will admit I did not really understand it until
a few years ago but that came with paying close
attention to what the government is doing and by
reading. We continuously hear our reps talk about the
deficit and how the deficit is bad and people will agree
but, when you ask them why, rarely can you get a
consistent answer. Well if I could I would like to use this
opportunity to try to clarify what happens when the
government spends money.

For one thing, when the government spends money
it must first take money from somewhere. The
government does not have any money to spend. When
they spend money, they must take it from us, the citizens
or they must borrow it. They take our money by taxing
us. Just see the withholdings on your most recent
paycheck stub for proof. The government takes our
money and spends it on things they believe are necessary
and more important to the point it takes our money
before we ever see it, thus preventing our use of it. Just a
quick question: can you imagine how mad people would
be if they really understood how large their tax bill was
by having to actually write a check for the entire amount
every April? Instead the government has changed the
frame of mind of paying our taxes into looking forward
to getting a refund because they took too much of your
money from you. They used your money and paid you
no interest for borrowing it. The government likes no
cost loans and they take them from us every year and yet
we do nothing about it. I discuss a solution to this
tax issue in my book.

Now regarding government spending, when the
government spends our money they inhibit our ability to
utilize that money for the uses we desire. No
consideration is ever given on the real cost of taxes when
it come to reducing economic activity stimulated by the
free individual and the use of his money as he sees fit.
The focus is always geared toward an immediate need
usually in some area which stimulates emotions in
people. When decisions are based on emotions instead of
facts, potential consequences, and the likelihood of
mistakes increase. Need proof? Look at all the programs
created by government and tell me one which is run
efficiently and effectively after an honest assessment and
then tell me would they be worth repeating. I cannot
think of any. The reality is those in government spend
our money in such inefficient and wasteful ways because
they are not held accountable for mistakes. It is very
easy and I am sure quite intoxicating to be elected to
spend other peoples’ money and receive a paycheck for
doing it as well. Don’t you think?
The spending of Americans’ money has now been so
intoxicating to our government officials it is now
reached a point where our standard of living is about to
begin declining if it hasn’t already. Our taxes are
increasing to cover government’s needs and our ability
to borrow money from other countries is diminishing.
 

Countries such as China have now in 2010 started
reducing the amount of US debt it holds because it is
worried about their investments. They are worried our
financial system could have more and even greater
problems in the future thereby putting their holdings at
risk. Understanding risk as a financial person myself, I
would be worried about my money too, and I am.
The Federal Reserve has created so much money
now and inflated the dollar to the point other countries
feel it is too risky to hold the dollar and in 2009, new
reserve currencies were beginning to be discussed. This
also causes these countries to not be interested in buying
our bonds (i.e. loaning us money) because they know
they will be repaid with dollars which are less valuable
in the future. To pay the interest alone on our federal
debt is costing us billions every single year. This is
money which is buying us nothing but time while
worsening economic activity is impeding our very
ability to earn more money and thereby pay more taxes.
It is a spiraling effect.

Eventually we will have to pay back the principal of
the money we have borrowed. Where are we ever going
to get that kind of money? To use an analogy most
people understand, the U.S. is now much like a person
who has maxed out their credit cards and cannot even
afford to pay the minimum payment. Every day the debt
load gets higher and higher and none of our money goes
toward trying to lower our debt load by paying on the
principal. Lowering the debt and government spending
will keep our creditors happy and prove to them we are
financially responsible and not close to bankruptcy. The
creditors of the United States are not happy with us right
now.

You see, if others believe we can not pay our debt
back, they will attempt to do the prudent thing we would
all do and cut their losses. This means any dollars they
currently hold, they will try to get rid of by purchasing
goods, commodities, food, as well as other currencies
used throughout the world. They will try to get rid of
their dollars because they fear they will become of lesser
value or worthless very soon. This flooding of the
market with dollars to purchase everything in sight will
cause extreme demand and additional fear in others who
hold U.S. dollars. What this leads to eventually and very
quickly is the skyrocketing of prices of everything priced
in dollars. This avalanche is caused because as people
want to get rid of their dollars, less people want to take
dollars due to the high risk of a U.S. bankruptcy. So in
order for someone to take dollars for goods, they will
demand more dollars to hedge their risk of now holding
the declining U.S. dollar.

This is the dreaded hyperinflation scenario which
can be caused by government overspending, borrowing,
an out of control federal deficit, and excessive taxes. In
essence, the money and savings you may have saved
your entire life could be made essentially worthless and
you can do nothing about it. This is the ultimate price
and it will be paid by you and me, the citizens of the
United States if we do not start getting control of our
government. Is this a good enough reason to start paying
attention to what is going on in Washington and what
our government is doing to us with their extremely
excessive spending?

Something else really bothers me about how our
government goes about spending the money it takes
from us. Now there are legitimate needs for government
where funds are necessary such as in the defense of the
nation and the people against its enemies but I am not
talking about that particular issue. It is a fact that
government sees fit to attempt to socially engineer our
behavior through its programs and to influence how we
live by punishment and reward. They attempt to steer us
into taking actions that benefit them and their power.
This is done for example by giving tax incentives to buy
certain cars, car they want us to drive. What right do
they have to punish me into driving the car they want? It
is not authorized by the commerce clause or the welfare
clause as we have already discussed.
Another problem for which we are stuck with the
bill is when the government creates its programs for our
benefit using our tax dollars. They many times create
them to last forever and also build in automatic increases
in funding which will add more to the program every
year, growing additional government without actually
making new laws. For example and this may get a little
numbers heavy, but such is my nature and may be
another silly example but it does make a good point.
 

Let us say a law is written to spend $100 per year on
widgets (a fictional government need). Feel free to add as many
zeros on to that $100 as you like, the government seems
to and again bear with me here with a silly example but
remember we are talking about government spending
here. So, in the creation of the law it is determined there
will always be a need for this program and it will need
funding forever. It is also determined because the
population is expected to grow every year and inflation
must of course be considered, the funding for the widget
program’s funding must increase by 3%
per year for five years then by 7% every year after.
Wow, on a side note, this is a pretty good deal for those
widget makers and those who study widgets. They will
be happy to support their representative with money and
votes for this measure and also unlikely to vote for him
if he does not. Although it was not my intention here to
show how elections are influenced, I think this makes it
quite clear.

Once a program like this is in place, anyone saying
spending in this area should be cut will be accused of not
caring about the poor widget employee who will lose
their job in that congressional district, especially that
district’s congressman. Part of this point is programs
continue for reasons which go way beyond those for
which they were originally established.

Now to return to my point regarding spending or
spending cuts once a program is in place. To you and I,
when we cut spending in our households, it means quite
simply; we spend less money than we did before,
correct? If we are spending $100 per month on eating
out and our spending goes to $75 per month, this is a
reduction in spending in our eating out budget. Well, the
government does not work that way. In many cases, a so
called cut in spending is merely a reduction, usually
temporary, in the automatic yearly increase which is
built in when the program was created. Let us go back to
the widget example and it is now ten years since the
program went into effect. Due to the automatic increase
of 3% for five years and 7% thereafter, we are now
spending $162.59 in year ten on the program. Please
note, a financial calculator is helpful here! So a program
sold to the public by politicians which cost the U.S.
citizens $100 at inception is now costing us $162.59 this
year thanks to built in automatic increases. That is ten
years into the program and the automatic increase is now
7% per year so we can expect to spend $173.98 next
year in year eleven. Just a quick question, is it any
wonder the federal budget is so large when they use this
kind of math?

Okay, so hypothetically let’s assume the government
decides it needs to cut some spending, so how do they do
it? Well, in many cases they simply cut the automatic
increase. Rarely if ever do they reassess and/or eliminate
unnecessary programs completely. So in this case they
reduce the automatic increase from 7% to say 6.45% so
instead of spending $173.98 next year, they spend a
mere $173.08. Remember last year in year ten of this
example, $162.59 was spent and next year $173.08 will
now be spent thanks to the money saving cut in
spending. So technically, the government will spend less
than was originally expected but in reality, they still
spent much more than last year. And now you know how
a politician can say he voted for spending cuts but in
reality still without much notice, voted to spend more on
the program in the following year. This is nothing more
than taking advantage of built in wiggle room created by
politicians so they can have their cake and eat it too.
They can tout a spending cut to the voting public but still
increase funding to the widget maker or fellow crony so as to continue their support for his reelection as well.
 

If you and I cut spending in our personal households
this way, we would be bankrupt. I guess it is somehow
okay to work math this way when you are spending
other peoples’ money, our money, the money which
belongs to the U.S. Citizens who actually earn it.

This U.S. Citizen