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Spending Cuts: Fake or Real?

by Sven R. Larson, Ph.D.

Sensible people want smaller government. The question is how to cut it; contrary to what is often suggested, not all spending cuts are the same. Some cuts are aimed to actually reduce the size of government and ease the burden on the private sector; other cuts, however, are done to preserve government at the very expense of the private sector.

How does this work? How can any reductions in government spending be better for government than for taxpayers?

To answer this question, let us begin with the first type of spending cuts, namely the sensible type of spending cuts. These are reductions in government spending the whole purpose of which is to give the private sector more room to grow and thrive. Therefore, these cuts remove government monopolies on specific sectors of the economy – education and parts of health care come to mind – and pave the way for tax cuts.

Sensible spending cuts are permanent in nature, in other words aimed to remove government spending programs and forever hand the money back to the private sector.

The other type of spending cuts put government first. They typically happen when government is experiencing an episode of fiscal panic, in other words is under stress from a rapidly growing budget deficit and declining tax revenue. Spending cuts under fiscal panic are designed to preserve government as much as possible – in other words, to make government more affordable to a shrinking tax base.

Precisely because panic-driven spending cuts put government first, they always come with, and are often preceded by, efforts to raise taxes. Since the goal is to save government at any cost, reductions in spending will come only as a last-resort measure, and only when public resistance to higher taxes becomes an acute re-election threat.

When spending cuts eventually take place under fiscal panic, they are not the cuts that secure a fiscally sustainable government, nor are they the types of cuts that are helpful to the private sector. They will always be the kind of cuts that minimizes the agony for government workers and the political price that legislative statists believe they have to pay for those cuts. 

A key element in this type of spending cuts is the "cheese slicer" method. Instead of prioritizing cuts to some functions of government while protecting others (law enforcement, infrastructure), this method cuts away an equal percent of spending from all programs of government, regardless of how those programs serve the private sector. Infrastructure, for example, is essential to thriving businesses, as is reliable, serve-and-protect minded law enforcement.

Public schools, on the other hand are not essential to the private sector. Education is, but not public schools. The same applies to health care: private hospitals and medical clinics are just as good as - empirically, in fact, better than - health care provided by government.

The difference between sensible cuts and panic-driven cuts to government spending is the difference between a thriving economy on the one hand, and stagnation and industrial poverty on the other. If our legislature can appreciate the difference, they can choose to be proactive instead of reactive; they can choose to work for, not against, the people who vote for them and pay their taxes.

Let us hope our lawmakers understand this difference when they go into the 2018 session next week.

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Saturday, 24 February 2018

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