Like most governors around the country, Arnold is immediately faced with a quandary. There are more commitments to fund services than there is revenue to fund them. The first impulse is to raise taxes, but this goes against a more abstract piece of wisdom: high taxes discourage enterprise, which could, in the long run, harm revenue flow.
The Supply Siders have long encouraged the view that you can have your tax-cut cake and eat it too, inasmuch as lower taxes generate new investment which yields more revenue. That’s fine, but hard to take for granted, since no one can know with certainty that this will happen at a particular tax rate and thus if (or when) the new revenue will arrive.
In most states today, there is no magic bullet: spending must be cut. The federal government has to worry less about this because it owns the printing presses that allow it to print as much money as it wants to spend. At the state-level, however, politicians bear the burden of finding real resources to back their spending promises or going back on those promises.
Now, budget cuts are always and everywhere a good thing because resources are better employed by private individuals rather than burgled and squandered by government. Government spending of all sorts may appear “generous,” but it is backed by coercion since it is paid for by force, whether through direct taxes, borrowings that crowd out private investment (and are to be repaid by taxes), or revenue that comes through charges on monopolized services.
We know why it is difficult to cut government spending. The political process is muddy and slow. The interest groups dependent on the money clamor and scream. The politicians who depend on the interest groups are always ready to swing into action to defend a particular spending program. No politician wants to be seen as “cruel” or penurious (even though they are using other people’s money).
As bad as these considerations are, none of them get to the heart of the real dilemma concerning spending cuts, which is more fundamental. It is this: there is no way to know what cuts are economically rational and what cuts are not. There is no real test to gauge this question. It all comes down to political whim, which is to say that all budget cuts in government are economically arbitrary. This is in contrast to private enterprise, where there are always indicators to show the way to rational budget cuts and a means to gauge whether the right decisions have been made.
Let’s back up a bit in order to understand why. In private enterprise, business has access to the accounting books, which are designed to reveal income and outgo and thus profit and loss. Expenses go toward purchasing goods for sale, labor costs, production costs, marketing, and a host of other considerations. There is also a detailed revenue breakdown, so that managers can see which undertakings are yielding revenue and which ones are not. If particular lines of production are not generating revenue, and not likely to do so in the future, they are living red-flags screaming “Cut me, cut me!” If other lines are generating revenue, they scream: “Expand, expand.”
Yes, there are judgment calls to make. All data that managers deal with are past data; meanwhile, managers are dealing with an uncertain future. The market is a process of ceaseless change. Prices change, as do consumer valuations. Business conditions change too, and the entrepreneur has to decide whether to prepare for sunny weather or stormy days ahead. Making these judgment calls is the essence of good management. Experience helps, of course, but it is not everything.
Even given this, private enterprise isn’t flying blind. The balance sheet doesn’t cease to exist after the cuts have been made. There is a market test to determine if the right decisions have been made. How does it do this? Through the glorious indicator of profit and loss. Profits indicate that the right (most economical) decisions have been made. Losses indicate that something is still wrong and more has to be done. It could be that the business needs to shut its doors, and economically reality will ensure that this will be done if there is no way to rescue profitability.
In government, it is completely different. Managers are faced with a revenue flow that is utterly unrelated to outflow. Those who benefit are not usually the ones who pay. The recipients of the money or services are not paying a market price, so their purchase or non-purchase of the good is not a reliable indicator of its value. And the revenue stream is not controlled by the payers because they have no choice as to whether to fund or not fund the system. The government is merely a giant machine that takes and gives in an unchecked process.
For this reason, government bookkeeping is completely unlike private enterprise. It cannot identify profitable lines of production versus money-losing ones, so it cannot discover the least-cost means of cutting back. Whereas judgment calls are essential in private enterprise, they are tied to assessments concerning the social merit of the enterprise as judged by profit and loss. In the so-called public sector, judgment calls are only that: the preference of the person making the judgment.
An example: let’s say the government funds 100 public parks. Some people call this waste but others say it is not, because of the crying need for more green public space. The pro-cut faction makes the point that nobody visits these parks. The anti-cut faction says that this isn’t the point because the whole community benefits by their very existence, and, in any case, the fact that people don’t go to them cuts down on clean-up costs. The pro-cut faction says that the money is better left in the hands of private developers. The anti-cut faction says that pastoral scenes are more important than strip malls.
So goes the debate, on and on. Who is right? We might be more sympathetic to one side of the debate or the other. But in the end, there is no real way to know. No one knows for sure whether the public parks are really socially beneficial because there is no means to discover their worth. They cannot be bought or sold. They may be just the thing to have, or they might be a fantastic waste of money. The only way to know for sure is to subject their existence to the disciplines of private enterprise.
What’s true of public parks is true of the whole panoply of government-provided goods and services. That goes for every line of the budget, from public housing to education funding to military intelligence. We all have our opinions concerning what is valuable. But from an economic point of view, these are irrelevant. What matters is how people are willing to use real resources in the real economy. (A possible objection: what about a government service that really does “pay for itself,” yielding more revenue than expense? Answer: if it can be shown to be economically viable, there is no excuse remaining for not privatizing it!)
This is one reason so many political arguments are beside the point. Some people say it is outrageous to fund welfare for bums when the national-security state is so starved for cash. Others say it is grotesque to spend money bombing innocents abroad while the poor languish and starve at home. Who is right? Neither, and, in practice, they agree to disagree and fund both (which is one reason the state always grows).
How society should use its resources is something that no one person is in a position to determine. The market economy provides the mechanism to sort out conflicts among differing valuations.
Given this, what does the government do when it comes time to cut the budget? It cuts in ways that are most beneficial to the government. This could mean punishing the public in the most severe way possible, as when the federal government closes the only services that people really depend on (monuments, passport offices, and the like). It could also mean punishing one’s political enemies, as when Democrats slash funding for those likely to vote Republican, or Republicans slash funding for those likely to vote Democratic.
In times of tight revenue, the question always arises: where are you going to cut the budget? There is no way to win this game. No matter what the politician says, the media are ready to scream in defense of those being cut. The only good answer is the one Murray Rothbard gave: cut anywhere and everywhere.
Thus can economists agree with both right and left. It is grotesque to fund welfare and/or warfare when there are so many needs going unmet. Any steps away from government provision of resources are steps toward accountability and social benefit as measured by the only means of determining such things, through the free and voluntary interactions of real people using their resources as they see fit.
