TCS Daily

Tech Boom Hides Looming Disaster

By James Freeman - April 24, 2000 12:00 AM

Well, by now you've probably paid the IRS for all those wonderful government programs that you enjoyed in 1999. And weren't you amazed at how reasonable the price was? All jokes aside, we naturally focus on the huge amount the Feds take from us in taxes, but what about the other side of the equation? What exactly happens to our hard-earned cash once it arrives in Washington?

Actually, in recent years the politicians have made a dramatic change in their spending habits, and it signals trouble ahead. Next year, the Federal government will spend at least $1.83 trillion of your money. The President and Congress tell us how hard they've worked to balance the budget, but don't believe it. Even after adjusting for inflation, Federal spending has increased more than 15% during the Clinton presidency, reports Steve Slivinski of the Cato Institute.

Luckily for the politicians, America's high-tech boom and your hard work have been increasing America's wealth even faster, which in turn has created large tax bills and record revenue collections at the IRS. But what happens if the economy turns south and your income and tax payments turn with it?

The tech boom times are masking a huge problem, described in an excellent report from the non-partisan Tax Foundation. First, consider a little historical perspective. Here's the budget breakdown from forty years ago, in fiscal year 1961: National defense received a full 51% of the Federal budget, Social Security consumed 13%, "income security," (payments for disability, unemployment, food, housing, etc.) received 10%, and health and medical bills added up to just 1% of the Federal budget.

This coming year, only 16% of the budget will go to national defense, while 23% will pay for Social Security, 14% will go to income security, and 21% will be devoted to health and medicine, up from 1% at the start of the 1960s. What does it mean? In percentage terms, obviously we're spending a lot less on national defense and a lot more on health care and related entitlement programs.

You might see this as the mark of a civilized society, spending money on treating the sick instead of arming for war. As Saturday Night Live's deep thinker Jack Handey once said, "Instead of building more weapons of destruction, mankind should be trying to get more use out of the weapons we already have." That's roughly what we've been doing, cutting defense and enjoying a peace dividend. Adjusted for inflation, U.S. defense spending has fallen more than 30% since the height of the Reagan build-up in 1985. It seems to make sense, given that we're now enjoying the peace secured by Reagan's victory in the Cold War.

The problem is that Federal spending is now almost completely out of our control. In the 1960s, when defense spending was the major budget item, Congress could debate whether we needed another aircraft carrier or a new tank. Today, with guaranteed benefit programs consuming an ever larger portion of the budget, Congress can't debate whether to pay for Grandma's Medicare next year or whether to send out Social Security checks. Congress has no choice. Those checks have to go out. Folks are now entitled to this stuff.

It's also interesting to note that even after the politicians reformed welfare, "income security" programs now consume a larger portion of the budget than they did in 1961, 1981 or 1991.

If you graph the history of the world, it's not a straight line running upward. There are peaks and valleys. Stuff happens. Wars happen, depressions happen. But in order to keep its promises to the poor and the elderly, our government now relies on an almost perfect set of economic conditions. Of course these conditions won't last, but the promises have to be fulfilled.

Think of it this way: we're enjoying the longest peacetime economic expansion in our history, unemployment is near a historic low, people are richer than they have ever been, and we're still spending a record amount on programs to assist people in need. What happens when lots of Americans are really in need? What happens if we have to step up to a national security challenge?

Given the Federal government's current habits, it's almost inevitable that taxes will increase. That's why it's absolutely crucial that we cut taxes now and get any surplus dollars out of Washington. It's not just that the politicians will spend all the available money. In the course of spending it, they'll make new promises that will require more money every year, whether we can afford to pay or not. Already, the President wants to promise new prescription drug benefits for Medicare patients, Internet access for Information Age "have-nots," more money for the Department of Education, more money for the Social Security program, instead of a free-market reform that allows people to pick their own investments.

I'm a big fan of technology and I'm optimistic about our economy, but good times don't last forever. Our government is spending as if they do, and that's going to cause a lot of pain when the tech boom ends.

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