Wednesday, April 25 , 2018, 1:51 pm | A Few Clouds 60º


Tom Watson: Capps’ Budget Musings Misleading

Congresswoman continues to champion the policies that led to our fiscal mess

Rep. Lois Capps recently penned a letter (“Rep. Lois Capps: The Complexities of the Federal Budget”) that addressed her thoughts on the complexities of the federal budget. Coincidentally, I had previously submitted an op-ed addressing President Barack Obama’s fiscal year 2012 budget proposal (“Tom Watson: Obama’s Budget Proposal Profoundly Irresponsible”). Unfortunately, her words leave one with the sense that Capps is merely parroting talking points and isn’t serious about truly dealing with our acute fiscal issues.

I was heartened to read that she at least acknowledges that our federal budget deficit is a big problem. Indeed it is. This begs the question, though: Where was she during the past several years when she dutifully voted for every major spending blowout pushed forward by her party that have given us these massive deficits? 

The Past

When the Democrats took control of Congress in January 2007, they immediately began working to spend more money. President George W. Bush and the Republicans certainly had their spending challenges, and the budget deficit in fiscal year 2007, which was produced by a GOP House and Senate, was about $160 billion. The first budget put together by the Democrat-controlled House and Senate for fiscal year 2008 had a deficit of about $460 billion, and it has been off to the spending races with staggering deficits ever since.

To reiterate our situation: In fiscal year 2009 through 2011, our country will amass new debt of about $4.5 trillion. This year will be the third year in a row with deficits exceeding $1 trillion. This amounts to about $15,000 per person of deficit spending during the past three years. Fiscal year 2011 alone will have a deficit of more than $1.5 trillion. Rep. Capps supported all of it.


But why dwell on the past when there is so much in the present and future to deal with? She claims that one-third of the current deficit is because of the recession. For the sake of argument, let’s accept that at face value. That still means we have more than a $1 trillion structural deficit this year. That is unacceptable by any measure. Her assertion that the deficit “isn’t just a spending problem” holds little water.

The problem is clearly spending. President Barack Obama and the previous Democrat Congress have driven our federal government spending to a level of 25 percent of gross domestic product (GDP). Since 1949, our historical overall tax revenue as a percentage of GDP averages about 19 percent. The following chart shows something known as Hauser’s Law, which shows federal tax revenues as a percent of GDP and top marginal tax rates. It is remarkably constant and insensitive to tax rates.

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So, given that about 19 percent of GDP has proven to be the tax revenue that can be counted on, voting for budgets, as Capps has, with 25 percent of GDP for spending is guaranteed to run a massive deficit — recession or not. Revenues are indeed down during the recession, but that is no excuse for structural deficit spending at the level we have now.

For the remainder of fiscal year 2011, the Republicans want to cut $100 billion from spending; the Democrats, including Capps and President Obama, don’t. This “cut” represents a whopping 2 percent reduction in federal spending. To listen to Capps, this 2 percent spending cut borders on the apocalyptic. If we can’t cut 2 percent from our spending, what can we cut?


Note in the chart that raising taxes on “the rich” has literally no impact on the overall percentage of tax revenue captured by the government. The total revenue percentage is essentially constant whether the top rate was 90 percent or 28 percent. Capps’ bromide that the “wealthiest among us” need to pay more taxes would not change the dynamic we face, the evidence is quite clear.

Her call is tired old class warfare with no basis in economic reality. The government could confiscate every penny the “rich” have and it wouldn’t come close to solving our fiscal problems. She states we need private-sector job creation. That’s true enough, so I’d love the congresswoman to explain to us how taking money out of the private sector by increasing taxes on “the wealthiest among us” is going to improve the economy and create private sector jobs.

How does taking money out of the private economy help that private economy grow? We can all look forward to her illuminating thoughts on that subject.

Capps’ highly misleading assertion that extending the Bush tax rates to the wealthy would “cost” $1 trillion is so typical of creatures of government like she has become. That comment implies that it’s the government’s money in the first place. It’s not. Secondly, the extension was for two years only, and it won’t total anywhere near $1 trillion.

Growth, Economy and Jobs

Capps also seems to believe that government spending creates jobs, as she intimates that GOP proposed spending cuts are bad for California jobs and suggests that the GOP budget cuts would cost hundreds of thousands of jobs. Nonsense. Unless, of course, you think a government job funded with borrowed money is equivalent to a self-sustaining private-sector job. 

Question: Why hasn’t all this government spending created all the promised jobs? Answer: There isn’t a giant pool of money the government has in a secret vault to draw upon to spend to “create jobs.” Every dollar the government puts into the economy as stimulus or other spending has to come from somewhere. It is either taxed or borrowed from the private economy. That is money that is no longer in the private economy creating economic activity.

No new wealth or spending power is generated; the money is merely transferred from one pocket to another — from the private sector to the government, where it is typically directed to politically favored activities such as “green energy” or “shovel-ready” jobs or the like, which generally have little long-term wealth-creating prospects.

We can’t create buying power by simply transferring money around. If it were only that easy. Even if the money is borrowed from overseas investors or governments, it merely adjusts the balance of payments, and that will cause net imports to increase. No matter where the government borrows or spends the money, it has no impact on overall demand or economic output. Printing more money and spending it just devalues the currency and creates inflationary pressures.

If deficit-driven stimulus spending worked, the Great Depression wouldn’t have lasted as long as it did, the Japanese wouldn’t continue to suffer stagnation despite running up massive debt on “stimulus” and “infrastructure” spending over more than a decade, and President Obama’s stimulus would have worked.

In each case these expensive programs didn’t achieve their stated goals and just created a lot of debt. If the government could just spend borrowed money and create growth and jobs, we would never have recessions. Clearly this isn’t so.

The Obama “stimulus” that Capps voted for mainly propped up state and local governments for a year or so and merely delayed the day of reckoning as we are seeing here in California. The Congressional Budget Office recently produced a report noting that the jobs “saved” or “created” by stimulus spending cost at least $228,000 each. Some were even much higher. Quite the bargain!

Keep in mind these jobs were almost all government jobs paid for with borrowed money — money borrowed from our children and their children. Government jobs create no product, no profit and no wealth, and are not self-sustaining like a private-sector job. They are overhead — pure and simple.

No business would ever increase its overhead costs when revenues are declining, yet this is what we did with the “stimulus.” The federal government has hired about 200,000 government workers in the past couple of years while we’ve lost about 8 million private-sector jobs in this recession.

Capps also claims the recent ObamaCare bill will cut costs and reduce deficits. Demonstrably untrue. Please see my piece “Tom Watson: Obamacare and You, and the Reasons to Repeal It” for more details. She told us last summer it was a “big gamble,” and on that count she was correct.

Going Forward

We are on track to literally ruin our country financially if we don’t cut our spending significantly and get our long-term budget on sound footing — and we need to do it soon. Our debt stands at $14 trillion, and our GDP is about $15 trillion. When a country’s debt approaches its GDP, it is historically on the down slope of prosperity. Our unfunded liabilities for entitlement programs are more than $100 trillion.

Government spending has exploded during the last several years, and we can no longer continue spending money we do not have. Government spending is crowding out private investment and is impeding private-sector growth, not helping it. We need private sector, not government growth. Growing the public sector at the expense of the private sector as we have been doing the last few years is a recipe for disaster.

Capps still seems wedded to the status quo of feel-good government-driven “investments” that clearly can’t continue and are generally ineffective and inefficient in any event. She claims the budget is complex, but there is nothing complex about understanding the magnitude of our budget problems, yet she doesn’t seem to get it. Like President Obama, she is apparently not serious about putting our fiscal house in order.

The congresswoman’s musings on the budget were little more than misleading and inaccurate talking points and platitudes that are rooted in the past. The government spending party is over, and the sooner politicians of all stripes get that into their heads, the better for all of us. The time has come to revisit our relationship with the federal government and re-examine all of the programs and agencies that exist. We simply cannot afford the government we have.

Tom Watson is a Santa Barbara businessman and was the 2010 Republican nominee for the 23rd Congressional District.

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