I have written before that the government generally spends a little less than 20 percent of GDP and if left unchecked Medicare, Medicaid and Social Security will take 20 percent of GDP all by themselves by 2050. Recently, government spending has exploded with all the bailouts, the assumption of Freddie and Fannie and the TARP money. Some observers say we are moving toward Federal spending of around 22 percent of GDP and if we add Obama's universal health care we will be at 27 percent. The question that the politicians never address is "how are we going to pay for it?" It is too much to assume that the government can finance these expenditures through borrowings. First, the market will become saturated, government borrowing costs will rise and crowding out will occur as rates also increase for private investment resulting in lower borrowings by businesses and consumers. Indeed, more government borrowings to finance ever increasing spending dooms the economy to slower business investment and slower economic growth. Second, the Fed can monetize the national debt - like it has been doing recently - by buying Treasurys and agency securities. This, of course is purely inflationary which will ultimately add to our economic woes. Third, the government can raise taxes. This, too, forebodes economic disaster. Higher taxes means less consumer spending and less business investment. The question is what type of taxes and on whom? Given that nearly 50 percent of all wage earners do not pay Federal income taxes, it would political suicide to start imposing taxes upon them. For the 50 percent who do pay taxes, forcing them to shoulder the load of $700 billion more would result in increased tax avoidance, a mass exodus, a revolt or both. More than likely, the new taxes will have to be in the form of a consumption tax. This is a hidden tax which will be assessed on all purchases of final goods and services. The resulting driving up of prices will lower real income and decrease the quantity of goods and services demanded. The end result will be lower wealth, less investment, and a poorer citizenry. It is very likely that government spending and taxing will cause my grandchildren to be the first American generation that is poorer than the previous one. Today more and more businesses are relocating their headquarters out of the country to avoid ever increasing burdens of regulation and taxation. However, unlike within the states when people can move to another state, there are no other country where I would rather live. So I guess I can take some comfort in being 63 because by the time all this occurs I should be dead.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com