"New Jersey - A 'Diogenes' for the Federal Government"

Sydney M. Williams

Thought of the Day

“New Jersey – A ‘Diogenes’ for the Federal Government?”

May 27, 2010

Speaking Tuesday before the Manhattan Institute, Governor Chris Christie of New Jersey spoke of his states’ deficit, at 37% of the budget; he said, “…it’s the worst budget deficit in America – worse than California, worse than New York, worse than Illinois…” What he meant is that it is the worst state deficit. According to the U.S. Office of Budget and Management, the estimated U.S. Federal deficit for 2010 will be $1.556 trillion against a budget of $3.721 trillion – a 42% deficit. And these deficits do not include the losses being rung up by Freddie Mac and Fannie Mae, both of which have been excluded from the demands of the pending finance reform bill.

In many respects it is unfair to compare the situation in New Jersey with that in Washington. Most states are mandated to operate balanced budgets. The Federal government has no such requirement and it has responsibility for defense and most entitlement programs. But it also has no governor on costs, like Governor Christie.

President Obama is not alone in his proclivity to spend. During the eight years of George Bush’s Presidency, Federal outlays increased at a 6% annual rate, roughly double the rate of inflation. Under the new President there is no let up in estimated spending over the next six years, according to the U.S. Office of Budget and Management, and their assumptions about health care entitlement costs are benign relative to the expectations of most experts.

Additionally, the real cost of these enormous budgets has been masked by a period of exceptionally low interest rates, a situation which will not persist. A 100 basis point increase in the cost of our $13 trillion debt will add $130 billion, or about 3.5%, to the current budget, and once interest costs begin to rise they will likely go up a lot more than 1%. In the meantime, the Federal Reserve is incented to keep rates as low as possible.

Uncertainty, as to taxes and regulation, has prevented business from investing in their operations and consumers from investing for their futures. We see their reluctance in the record sums still sitting in money market funds, which serve the government in helping to keep rates low.

Speaking for New Jersey, Governor Christie pointed out that the state “does not have a revenue problem; it has a spending and debt problem.” The same is true for the Federal government. One might make an argument that those who make $50 million a year should not pay the same tax rate as someone making $250 thousand, but the argument should not be confused with the need to increase revenue. Penalizing high earners provides only the perception of equalizing social justice. History has shown time and again that higher tax rates do not produce more revenue. In today’s global world, people and businesses have great mobility. There is always a place in the world that is anxious to attract the most productive members of society. New Jersey, with its high tax rates, has experienced an exodus of high earners.

The tax code can be used to influence behavior. When taxes are too high, people move, or, more commonly, income gets hidden or deferred. When taxes are lowered people become encouraged and incented to become more productive. One can certainly argue that there has been a polarization of incomes in corporate America with CEO pay rising from about 40X average employee pay to around 300X today. On the other hand, anecdotal evidence suggests mobility –the number of high earners that have emerged from low or middle income parents – has never been higher.

Disincenting people to work and to save is not the answer to our financial plight. Low interest costs may help government today, but at the same time penalizes savers. Increased tax rates on investment income will discourage capital formation and make it more difficult for individuals to accumulate the amount of wealth they will need in retirement. Government intrusion generally adds redundancy and inefficiencies. For example, removing the consumer from the equation in terms of how to spend his health care dollars creates less efficiency, not more.

The problem of debt is considerable; not addressing the root cause – spending what we cannot afford on entitlements – is akin to kicking an inflating balloon down the road. It works until it bursts, as Governor Christie realized was about to happen in New Jersey when he took office.

The President, in his campaign, accused lobbyists of spoiling the brew. They, he claimed, have had undue influence on Congress and regulators and have increased costs. He said that, once President, he would put an end to their game. He has not, which is fine and understandable, because he cannot. The problem is not with the lobbyists; it is with those who let themselves be bought, especially elected officials in Congress, which is another compelling argument for term limits. Lobbyists are paid to try to influence decisions. That is their job and it is their right and they correctly target the most powerful, which is why Senator Dodd received special treatment from the folks at Countrywide Credit. Create term limits and you reduce the power of any one man or woman, without reducing the power of the institution.

In New Jersey, Governor Christie is addressing the deficit in a realistic manner – asking teachers to con tribute 1.5% of their income for their health care and limiting property tax increases to 2.5%. President Obama, if he is serious about debt reduction, could take similar steps, but he would have to target entitlement spending, as Medicare, Medicaid, Social Security and now Health Care represent the bulk of the budget. As well, a push to impose term limits on Congress would be welcome.

Arnold Toynbee, the British historian once remarked that “great civilizations die from suicide rather than murder, which is to say that they die when they no longer possess the will to respond confidently and creatively to the very challenges that would otherwise make them stronger and better.” That need not be our fate.