If your personal spending rises faster than your income each year, you eventually will go bankrupt. Responsible people understand this and thus refrain from taking on more debt than their income can support.
This basic fact is true of individuals, businesses and even governments — look at Greece and Detroit.
President Obama presented his budget proposal for 2015 last week. As the accompanying chart shows, it calls for increasing government spending from $3.6 trillion this year to $5.9 trillion in 2024.
Much of this whopping increase is to be funded through more deficit spending — and thus increasing the debt-to-gross domestic product ratio, which is already at a record high for peacetime. Many good economists also think that the president is being overly optimistic about anticipated economic growth and government revenues.
There is nothing new about governments overspending and accumulating fatal amounts of debt.
A quote attributed to Cicero warned: “The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced if the nation does not want to go bankrupt. People must again learn to work, instead of living on public assistance.”
The people and the political class ignored the advice. The bread and circuses continued, the political leaders became increasingly corrupt, and the formerly invincible Roman army became so weakened that it was easily toppled by “barbarians.”
In the two millennia after Cicero, empire after empire rose — and fell, often as a result of excess government spending.
The American Founding Fathers understood the pressures on governments to overspend, and did their best to design a system to make spending difficult — but the political class has increasingly been ignoring the Constitution.
In his classic book “The Road to Serfdom,” published in 1944, the brilliant F.A. Hayek vividly described how the utopians always end up bankrupting the society and destroying liberty.
Vito Tanzi, distinguished economist and former Italian undersecretary for economy and finance, perhaps said it best in his new book, “Dollars, Euros, and Debt”: “It is important for citizens to recognize that resources are always scarce, and the function of government should be to prevent hell on earth, rather than try to establish heaven. When the state tries to do too many things, it inevitably brings excessive complexity in its actions and becomes inefficient.”
A couple of other economic maxims are worth remembering. The first is Mitchell’s Golden Rule of Fiscal Policy, which says, “Good fiscal policy exists when the private sector grows faster than the public sector, while fiscal ruin is inevitable if government spending grows faster than the productive part of the economy.”
The second is the Fundamental Law of Public Expenditure Growth, which, in essence, states that when new government programs are created and require an increase in government spending as a percentage of GDP, they have a tendency to grow continuously and spontaneously, always becoming more expensive.
Finally, we have Baumol’s Law: “The productivity of the public sector’s activities tends to grow less rapidly than the rest of the economy.”
