Public finance—the means by which government obtains the funds that it spends—is morally problematic. The more that government expenditures increase, the greater the likelihood of moral mischief.
Politicians in a democratic system inevitably seek to expand their importance and power. Control over government finances gives them the means to do so. Historically, democratic governments spent and spent until national bankruptcy, social decay, and political collapse ensued. (See Edward Gibbon’s classic “The History of the Decline and Fall of the Roman Empire.”) That’s why the U.S. founders detested democracy and strove to give us a constitutional democratic republic that would protect individual rights by limiting the scope—that is, the spending—of government.
The expansion of Uncle Sam happened at a snail’s pace for the first half of the 19th century. That pace accelerated during the Civil War and then the so-called Gilded Age of the late 19th century. Unfortunately, progressive intellectuals and muckraking writers created a convenient mythology by demonizing the so-called robber barons of the private sector, thereby deflecting attention from the real danger—increased government spending.
A more accurate reading of history is found in books such as historian Burt Folsom’s enlightening “The Myth of the Robber Barons.” Generally, the mega-wealthy entrepreneurs whom the progressives branded as robber barons earned their commercial success and gigantic fortunes by defeating competitors—often competitors that were being subsidized by Uncle Sam.
A primary feature of government expansion during the Gilded Age was what we today call cronyism—the practice of politicians bestowing federal largess on favored businesses. With typical political incompetence, congressional subsidizers during the Gilded Age backed inferior businessmen—those who had a greater talent for extracting subsidies from Congress than they did for providing a quality good or service at a competitive price.
The injustice of condemning successful entrepreneurs rather than the failures supported from the federal treasury is illustrated in the case of James J. Hill’s Great Northern Railroad. Hill was publicly reviled for the wealth he amassed, even though Great Northern was the only one of four transcontinental railroads that didn’t fall into bankruptcy and was also the only one of the four that didn’t burden taxpayers by receiving federal subsidies. Hill, like the other grossly mischaracterized “robber barons,” got rich by generating true prosperity for Americans. The true villains were the politicians and their cronies who were leeches draining wealth from the U.S. economy.
In the 20th century, Washington politicians made the fateful decision to democratize subsidies. Indeed, it was unfair for the federal government to subsidize special business interests; however, on the “two wrongs don’t make a right” principle, the proper government action would have been to discontinue business subsidies. Instead, the political class decided to extend federal largess to various segments of the American population—whether it was workers, the poor, the aged, the sick, those needing (or wanting) education, food, housing, and so forth.
Over the course of the 20th century, the practice of government redistribution of wealth from some citizens to others became the standard operating procedure in Washington. The groundwork was laid by the adoption in 1913 of the Marxian graduated income tax via the 16th Amendment. This telegraphed the progressives’ intention to convert and pervert the federal government from an impartial night watchman that would protect each American’s property with equal fervor to a corrupt dealer in favors, as in, “You vote for me, and I’ll provide a favor, a subsidy, for you at the expense of your neighbors.”
Indeed, a massive intellectual fraud called social justice has been concocted for the purpose of convincing Americans that although it’s a crime for you to take some of your neighbor’s wealth, it’s morally righteous for a democratic majority to vote for politicians who will appropriate your neighbor’s wealth on your behalf and give it to you.
Expanding the federal government by having it intrude into more areas of our society’s economic activities inevitably led to increasingly corrupt election campaigns. A key turning point was the 1936 presidential election, when Franklin Roosevelt (FDR) ran for a second term. The economy was still as stagnant as it had been under FDR’s predecessor, Herbert Hoover. Many Americans were considering making another change at the top. But Roosevelt cleverly steered millions of taxpayer dollars, appropriated for various New Deal programs, to key battleground states, causing many voters to vote for him because such-and-such a New Deal program employed Uncle Frank. (A more detailed description is found in Burt Folsom’s “New Deal or Raw Deal?”) FDR is the president, more than any other, who instituted the corrupt practice of using our tax dollars to bribe masses of voters. Today, of course, the practice is endemic, as we can see from President Joe Biden’s naked effort to use our tax dollars to buy votes from Americans whose college debt he seeks to cancel.
Another significant milepost in the expansion of the federal government came in the 1960s, when President Lyndon Johnson decided to wage a war in Vietnam and a domestic “war on poverty” at the same time. This “guns and butter” approach to public finance throttled the American economy with a painful mix of unemployment and inflation through the presidencies of Richard Nixon, Gerald Ford, and Jimmy Carter.
If the government had been a private corporation dependent on loans from capital markets to wage its expensive wars, private lenders would have declined to extend additional credit long before the federal debt soared into the stratosphere. But Uncle Sam is exempt from the strictures under which private organizations operate. Washington can pledge the “full faith and credit” of the government—a promise that amounts to saying, “Don’t worry, we will tax future taxpayers” (many of whom can’t yet vote and aren’t recipients of the benefits we’re doling out). Thus, our public finances include another morally corrupt practice: taxation without representation.
Uncle Sam has yet another way of spending beyond its means: a central bank with a fiat currency. The Federal Reserve System will create however many additional monetary units are necessary to fund Uncle Sam’s lavish expenses. Of course, as is understood by those who learned the lessons of Econ 101, the greater the supply of an economic good, the less the marginal value of each unit. That’s a fancy way of saying that money creation facilitated by the central bank inevitably erodes and ultimately destroys the exchange value of money.
Thus, Uncle Sam, with a complicit Federal Reserve, diminishes the purchasing power of our money and the value of whatever savings we’ve managed to accumulate. In fact, it’s the Federal Reserve’s stated policy to debase our currency at a rate of 2 percent per year, when the Fed was created for the purpose of preserving the purchasing power of the dollar. Morally, that’s a stealthy form of theft.
The moral defects of public finance all stem from a single root—the moral error that a proper function of government is to take wealth from some to give it to others. That’s the fatal flaw of democracy, and it explains why the national debt is $32 trillion and counting.
