Tea Party Economics
Brian S. Wesbury and Robert Stein, 04.21.09, 12:01 AM EDT
As government grows, we can expect more protest.
Accounts vary, but it seems that a few hundred thousand people attended one of about 500 Tax Day Tea Parties on April 15. In the aftermath, politicians on both sides of the political aisle were energized. Conservatives hoped the tea parties signaled renewed support for the idea of limited government, while some liberals called the protests unhealthy and unpatriotic. Don't ya just love politics?
The good news is that economists can take a more dispassionate view. And the way economists contribute to the debate is with public choice theory, an idea fathered by Duncan Black, Gordon Tulluck and the Nobel Prize-winner James Buchanan. While the theory of public choice can be broadly applied, it is the ideas of "special interests" and "rational ignorance" that are useful in understanding last week's tea parties.
Here's an example of public choice at work. Let's say teachers could benefit by $2,000 each per year (in higher pay or benefits, smaller classes, etc.) from a piece of legislation currently under debate. But the cost per taxpayer averages just $15 per year.
The "special interests" (teachers and politicians) have substantial personal incentive to see that the bill is passed. Teachers, who benefit directly, will use time and money to lobby for the bill. And lawmakers will expect campaign contributions, votes or both, in exchange for their support.
But the taxpayer will remain "rationally ignorant" of the whole process. Why spend time even thinking about an issue when the cost is only $15 per year?
A perfect example of this process can be found in the Sunday edition of The Washington Post, in the story "Murtha's Earmarks Keep Airport Aloft." The Post reported that John Murtha, D-Pa., using his powerful position on the House Appropriations Committee, has steered $200 million of federal funds to support the John Murtha Airport in Johnstown, Pa. Most voters have never heard of this airport and pay little for it. But passenger traffic is down by half in the past 10 years, even though the congressman uses it frequently. One could only wonder what would happen if all Americans were allowed to vote to continue funding this facility. But that's not the way the process works.
This is why government will tend to grow in excess of what a true democracy really wants. At least, it will grow until those $15 hits accumulate to such a level that people have finally had enough, and in a seemingly spontaneous eruption, the average voter finds the energy to fight back.
Apparently, this is what happened last week. This same energy was also evident in the midterm elections of 1994 when Newt Gingrich became speaker of the House, and in 1980 when Ronald Reagan became president by tapping into anger about the size and cost of government.
What's interesting is that many who did not have the energy or ability to attend a tea party last week still wanted to watch them on TV. The coverage of the events by Fox News, which highlighted the protests more than other outlets, attracted more viewers than MSNBC, CNN and CNN Headline News combined. This shows that millions more were paying attention and suggests wider support for the protests.
Some analysts have made the case that Americans are not overtaxed (at the federal level) and that therefore the protests were not justified. But this misses the point. Government spending is exploding, with the Congressional Budget Office projecting $9.3 trillion in deficits over the next 10 years. People know that this spending represents future taxes.
Here is an interesting set of facts. If the government increased the top tax rate from the current rate of 35% to 100% (yes, that's right 100%), it would only collect an extra $400 billion this year. In other words, confiscating all the income that is currently taxed at 35% would not raise enough revenue to cover any of the annual deficits projected in the next 10 years. There is no way that tax hikes on the rich alone can pay for proposed spending in the current budget.
In addition, state and local taxes are going up, with at least 10 states planning on hiking taxes. And promised future spending on Social Security and health care must also be paid for. Under the Obama administration's budget, federal government spending in the next 10 years will average 24% of GDP, almost triple what it was back in the 1930s. As a result, when we add together today's taxes and expected future taxes, Americans will face a bigger tax burden than at any time in history.
Meanwhile, the government is taking over private-sector companies, printing massive amounts of new money and interfering in the free market. And it doesn't help that this has happened while many government officials are running into trouble over not paying their own taxes, which undermines the Obama administration's call for the average taxpayer to sacrifice for the greater good.
In the end, the Tax Day Tea Parties are a very interesting case study for public choice theory. Whether or not they suggest a shift in the political landscape is another issue. If government continues to grow and cost more, we would expect to see more spontaneous voter response.
Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes.