Nothing new under the sun.

Introduction

Congress recently passed a bill with the childish name of “the Big Beautiful Bill.” I admit that I have not delved into the details of this bill, but I see at the outset that this is part of the same Big Mess.

As with all spending legislation, this bill consists of a vote-buying strategy. Government acts like the fat man who doesn’t know how to spell “diet.” It just gets fatter and fatter until eventually it will kill us all. (Please understand I use the word “kill” metaphorically.)

I have little hope that writing this article will inspire genius in the mind of any legislator. I have only a very small hope of changing the minds of those who benefit from government handouts. However, perhaps someone exists who will start a movement to convince people that the growth of government will ultimately lead to our economic demise.

There are two sides to this mammoth problem:
First, government disbursements (euphemistically referred to as “spending”)
Second, government receipts.

You can see from these two factors that the government acts as a mechanism of redistribution.

“Spending” — Government Disbursements

The first part of this redistribution process consists of government disbursements. (See graphic below.) These disbursements consist of three major categories: 1) transfer payments, 2) acquisitions, and 3) debt payments.

Transfer Payments

Transfer payments primarily consist of inelastic government payments, including Social Security, Medicare, and Medicaid. These payments comprise the largest portion of the federal budget and continue to grow as the aging population increases.

I must confess that I’m a beneficiary of the Social Security system, but that does not mean I think it’s a good idea. My payments help to finance this newsletter.

Acquisitions

I use the term ‘acquisition’ to refer to all disbursements directed toward physical assets or government-provided services. I include in this category the infrastructure that politicians like to discuss.

Debt Payment

Ultimately, the previous two spending items drive the size of debt payments. Conceptually, debt payment is easily understood, but it becomes terribly complex when one studies the financial markets. Additionally, considerable discussion centers on interest payments and government debt. Without getting into an involved discussion, ask yourself who receives interest payments and what they do with them.

Funding Government Disburements

To make all the disbursements mentioned above, the government must have sources of revenue. The three major sources of revenue consist of: 1) taxation, 2) borrowing, and 3) monetary inflation.

(In spite of what the MMTers will tell you, government does have to pay its bills. I will discuss the flaws in their “theory” in later newsletters.)

Taxation

Taxation, if it were not for the legalization, would be considered a form of theft. In all forms, taxation leads to price distortions and a misallocation of resources. By taking money from people by force, the government influences people’s preferences, causing them to buy less of some goods or services than they would in a free market.

Borrowing

Government borrowing consists of a somewhat less detrimental source of revenue for the government. At least when a person lends money to the government, they are doing so by choice, not as a result of force. Due to the artificial sense of security in lending to the government, buyers forgo the opportunity to invest their money in more productive uses.

When I use the term ‘borrowing,’ I refer to the borrowing of money that bank customers receive as a result of some productive effort, not from the artificial expansion of the money supply, which I will cover next.

Inflation

Some government borrowing does not consist of borrowing in the truest meaning of the word. When banks buy government securities, they are not engaging in a process of intermediation in which they use the resources of people who earned them. Banks simply create new dollars and make them accessible to the government. (I will address monetary expansion as a subject in later articles.)

Redistribution

As you can see from the second graphic and my description, the government conducts a massive redistribution of resources in the economy. One might argue that the entire market process involves the redistribution of resources. Redistribution by the government, however, has one fundamental problem. No one involved in governmental redistribution knows for certain what’s best for every citizen in the country. Only the interaction between buyers and sellers in the marketplace can make those decisions.

Note: I have focused on the flow of funds, but never forget the financial burden placed on consumers by the mass of government regulations.

Conclusion

When buyers and sellers make exchanges in a free market, they do so based on their personal and individual preferences — subjective values. Since the preferences of individuals always and everywhere determine values, politicians and bureaucrats will redistribute resources based on their preferences, and, despite their protestations to the contrary, never in the best interests of individual consumers. They have only one preference: reelection.

As the size of government grows, this misallocation of resources becomes more problematic. The fundamental problem lies with government disbursements (“spending”). To cover these disbursements, the government must “by hook or by crook” extract the resources from the public market. The advocates of tax cuts must acknowledge that the country’s problem derives from government spending.

Will legislators ever gain the political courage actually to start cutting spending? I really doubt it. But, I can hope, can’t I?

Until they start cutting spending, government finances will continue to be a Big Ugly Mess (B.U.M.).