Approximately half of all Americans receive government subsidies of one kind or another.
This is seen by some conservatives as the demise of the American Republic, the death-knell of resistance to the welfare state. It is nothing of the sort. It is strong evidence of the opposite: the high-water mark of the American welfare state. Why is this the case? Because American voters long ago drew a line in the sand on how much taxation they will tolerate. The only way that the federal government can maintain its existing level of spending is by borrowing. When the lenders finally close their wallets to the world’s most spendthrift dowager aunt — the government of the United States — the experiment in massive wealth through government wealth redistribution will end in a Great Default.[amazon asin=0990463109&template=*lrc ad (right)]
THE FULL FAITH AND CREDIT
The dowager aunt has a favorite phrase: “the full faith and credit of the United States.” By this, it means the United States government’s ability to extract wealth by force from residents of the United States. Why do millions of people believe in this phrase, and open their wallets to this clearly out-of-control debtor, whose defenders brag that she will never pay off her debts, nor will she ever be called upon to do so — Keynesians, monetarists, and supply-siders?
Other than Austrian School economists, what academic school of opinion has called for a return to 1836 — the first and last year in which the United States government owed no one anything?
The United States government cannot extract much additional wealth from the residents of the United States. Only if they grow richer[amazon asin=0974925381&template=*lrc ad (right)] can Washington grow more profligate. Here is the great irony: this has always been the case. The assumption that Washington can extract wealth at will is one of the many delusions of academic economists and members of Congress. This assumption has been long been refuted by easily available historical evidence. The politics of the federal debt points to a permanent ceiling on the voters’ acceptance of additional tax collecting. The voters are unconcerned about how much Washington spends. They simply refuse to pay for it.
By now it should be clear that Americans will not tolerate federal taxes any higher than approximately 20% of GDP. This has been true since the end of World War II. Even with the highest tax level, in 1944, the rate did not go above 21%.
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http://www.usgovernmentrevenue.com/revenue_historyLet me put it another way: 80% of GDP is inaccessible to the federal government through direct taxation. This is as close to an unbreakable political law as there is.
State and local taxation can extract no more than 13% of the wealth of Americans.
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http://taxfoundation.org/article/short-history-government-taxing-and-spending-united-statesConclusion: Americans are going to retain two-thirds of GDP as their income. Again, this has been going on for so long, that we might as well regard it as a law of politics.
Now let us look at the spending categories of the federal government. They are almost all non-discretionary. In other words, they are locked in.
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The surprise in the short run will be interest rates. The federal government has sold a lot of debt, and when rates go up, which they will, almost without warning, the federal budget is going to be hammered. It does not matter with respect to the debt owed directly to the Federal Reserve System, because the Federal Reserve retroactively returns most of the money to the Treasury every January. But for debt held by the general public, which means foreign central banks, a movement of the interest rate back to anything like 6% would create an immediate budgetary crisis for the federal government. This is non-discretionary spending, but it can change by a large percentage without warning in a very brief period of time.[amazon asin=B00B3M3UK6&template=*lrc ad (right)]
The other expenditures are pretty much fixed as a percentage of the federal budget. There can be jockeying around, but they do not change much in the short run.
About 17% of the federal deficit is subject to political machinations: discretionary spending. That is not a large percentage. The politicians spend all of their time screaming and yelling and trying to round up votes in order to pass new programs that will have to be funded out of the 17%.
The era of the big federal programs is over.
The only way that the federal government can significantly increase its spending is through additional debt. This is what it is doing. The public does not fight this. The public knows it will never have to pay off the debt, so why should voters bother to fight this? The public, half of whom are on the dole, want to get their hands on the money now, because it is available now. It may not be available tomorrow. “Take it when you can get it” is the attitude of the public.
