Budget, Deficit, Threatens Economic Freedom

As soon as President Bush released his 2005 budget, critics from both sides of the political aisle were fighting mad.

On the left, the budget was pilloried for allegedly catering to the rich while destroying programs such as childcare and housing assistance. On the right, the president was admonished for going on a spending spree.

The common theme is concern over the projected deficit (now about $500 billion). Democrats would use tax increases to cut it, while Republicans prefer to "control" spending.

Either way, Americans are told they will have to make some sacrifices — either higher taxes or fewer services — to close the budget gap. But this argument assumes the government has to have a budget at least as large as it is now.

Before World War II, government expenditures hovered around 5 percent to 10 percent of the nation's output. Understandably, this figure soared into the 40-percent range during the war. It dropped to as low as 12 percent in 1948 but has remained close to 20 percent ever since, with entitlement spending (Social Security and Medicare) accounting for a rising share.

Ironically, lawmakers tell us that these entitlement programs are the very reason the budget deficit must be eliminated. Closing the budget gap, they say, is vital to preventing the looming crisis in Social Security from crippling America.

Now, supposedly, is not the time to help "the rich" save more money. No, we have to shrink the deficit so that the government can provide healthcare for everyone.

But this attitude threatens the very reason America offers people such promise: that citizens are free to create their own wealth.

Taxing that wealth at every possible turn and redistributing it serves only to distort individuals' incentives and make their efforts less rewarding. Yet, year after year, sound economic policies are ignored for political considerations. The president's savings account proposals are a good example of this phenomenon.

For the second consecutive year, politicized fears over the budget deficit will relegate a perfectly sound economic idea — taxing savings only once — to the budgetary abyss. The proposed accounts would consolidate the myriad retirement accounts (401(k)s, 403(b)s, Roth IRAs, etc.) and establish the Lifetime Savings Account (LSA). (search)

LSAs would ensure that peoples' savings are taxed only once. The funds could be withdrawn at any time, for any purpose, with no penalty. Not surprisingly, the left has branded these accounts as "welfare for the rich." (searchBut this argument completely misses the point.

People want to be rich, and allowing them to try creates opportunities for others to try. Cubans don't float to Miami on tires because they think they'll be poor in America. Our graduate schools aren't filled with foreign students in search of poverty.

The scores of immigrants that moved through Ellis Island in the great migration period didn't cross the Atlantic for less opportunity. Questioning whether these immigrants (or anyone) become "rich" is an exercise in subjectivity.

But we do know that many of them choose to stay, and that many others try to follow them. There's no doubt that some immigrants want to escape political oppression, but economic freedom is inextricably tied to political freedom.

Being able to work, save money, own property and raise a family are all part of economic freedom, and because these opportunities have been denied is the reason that the politically oppressed flee to America.

Yet lawmakers consistently fail to grasp that these opportunities symbolize the American way of life. When arguing over the deficit, both Democrats and Republicans revert to entitlement rhetoric, ignoring individuals' economic freedom. Few are willing to point out that entitlement programs hurt individuals more than they help them, that the government spends nearly $1 out of every $2 spent on healthcare, and that Social Security encourages people to spend rather than save. Few argue that welfare-state policies (searchthreaten the very incentives that make the free market work.

It's much easier to convince people you want to help them by giving them money, regardless of whose money it is you're giving. That's why the deficit serves as an easy target for politicians — and why entitlement programs keep growing.

But the same logic behind the president's savings proposals could easily be used to reverse the flow of money into entitlements. The idea is to take fewer tax dollars from people so that they will have the freedom to create their own wealth, thus providing opportunities for others to create their own wealth.

This is the idea that embodies the spirit of our country, and if lawmakers would consistently apply it, there likely wouldn't be a looming crisis imperiling Americans' economic freedom.

Norbert Michel, Ph.D., is a policy analyst in the Center for Data Analysis at  The Heritage Foundation, a Washington-based public policy institution.