Early in the twentieth century Herbert Croly (cofounder of The New Republic) argued the State should “increase the national spirit,” “promote the national welfare,” and subordinate “the individual to the demand of a dominant and constructive national purpose.” In that spirit Franklin Roosevelt created Social Security and unemployment compensation in the 1930s, programs hard to undo, grounded as they are in the self-interest of voting blocs, including seniors and labor. In 1965 Lyndon Johnson established Medicare and Medicaid to provide medical insurance for retired and low-income people, who eventually viewed them as entitlements. Medicare recipients alone, Samples notes, constituted about one in five voters by 1982.

Ronald Reagan’s proposed spending cuts had little support in Congress even among Republicans, a development that continued post-1994 under GOP House Speaker Newt Gingrich. Republicans in power failed to abolish any federal departments, and President George W. Bush created a new Medicare prescription drug program. “The new entitlement appeared to be politically perfect,” Samples observes. “It promised benefits to virtually every organized interest, including the most powerful, elderly voters, without immediately imposing costs on anyone.” This is how federal spending, deficits, and the national debt expand.

Samples examines recent administrations’ fiscal records and draws lessons for today. Reagan “sought to control spending later by cutting taxes first” but did not deliver a significant reduction in the size of government as measured by spending. While FDR and LBJ told Americans the State could provide them with security and opportunity, Reagan asked whether government might also threaten liberty, opportunity, and wealth. Still, government continued to grow.

George W. Bush by contrast sought to save us all from moral decay at home and from political tyranny abroad. He had almost no interest in slowing the growth of government but made one effort—to slow the exponential expansion of Social Security. That was a failure, and Samples argues it was due to Bush’s unpopularity over his military adventure in Iraq. A president who enjoyed the trust and support of only a minority of Americans could hardly transform public opinion on such a crucial issue. Besides, Bush embraced “compassionate conservatism” and increased government spending, both of which contravened personal responsibility.

Rather than trying to stop the growth of government, Bush worked hard to increase it by pushing the Medicare prescription drug entitlement. Many voters favored that, yet dissatisfaction greeted the new benefit. Why? Samples argues two-thirds of voters, not just the elderly, took an unfavorable view because “it did not provide people on Medicare enough help with their drug costs.” Bush proposed $400 billion, Democrats countered with $800 billion, and they compromised on $500 billion. This bidding war for votes with tax dollars shows why the battle to restrain government has so far been a losing one.

How can we put the brakes on government growth? In a word: crisis. Samples’s most useful insight is that a crisis can catalyze policy change, toward either bigger or smaller government. FDR capitalized on the crisis of the Depression to greatly expand the size and scope of government. Congress’s failure to deal with entitlements and end record deficits has created a new crisis, which means that a future president will have the opportunity to act dramatically. Maybe that president will use the opportunity to make it clear to the people that mushrooming government spending and interference with liberty are the causes of our crisis. We might be able not just to shift course slightly but to turn the ship around.

Samples makes a strong case for individual liberty and constitutional government that should persuade people that their future happiness depends on finally putting limits on the State. The difficulty, he writes, is that “Almost all of the past 30 years in American politics suggests the federal government will continue to prefer borrowing to tax increases or spending cuts until an upper bound on borrowing is reached.” With a national debt over $14 trillion and talk about lowered ratings for federal bonds, we may be close to that upper bound.

The book provides a sober analysis of past defeats suffered by limited government advocates, but it also suggests that if we don’t let the building fiscal crisis “go to waste,” we can prevail. A popular president, mindful of both the Constitution and the key role of individualism, could lead Congress to deal with the entitlements that threaten America’s fiscal house. In sum, Samples’s work serves as an antidote to despair.

The Washington Times reported Wednesday:

U.S. debt shot up $239 billion on Tuesday — the largest one-day bump in history — as the government flexed the new borrowing room it earned in this week’s debt-limit increase deal.

The debt subject to the statutory limit shot way past the old cap of $14.294 trillion to hit $14.532 trillion on Tuesday, according to the latest the Treasury Department figures, which are released on the next business day.

That increase puts the government already remarkably close to the new debt limit of $14.694, which means one day’s new borrowing ate up 60 percent of the $400 billion in space Congress granted the president this week.

That didn’t take long. Clearly normalcy has returned. But sighs of relief seem inappropriate.

Weathering the “Cuts”

The day after The Deal was signed, lifting the debt limit and “averting default,” America awoke to CNN reporter Richard Quest’s Keynesian lament that “the economy won’t weather the cuts.” Cuts? He apparently meant the small reductions over ten years in the rate of spending growth. That’s Washingtonese for “cuts.” What Murray Rothbard called a “cut-cut,” where the amount spent actually falls from the present level, long ago passed from consideration. In our world there are only two varieties of “cuts,” both of which are in The Deal: “real cuts” (reducing the rate of growth) and “phony cuts” (canceling an authorization for spending that no one expected to occur anyway). If you don’t get that, don’t worry. It will all be in the next edition of the Newspeak dictionary.

Even if we accept the Keynesian framework for the sake of argument, we might wonder about an economy that is so fragile it won’t survive modest reductions in the rate of increase in government spending. Even the New York Times sees what’s going on:

There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.

By the end of the 10-year deal, the federal debt would be much larger than it is today.

Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.

One gets the feeling that the frantic opposition to the mere slowing of the growth rate is motivated less by concerns about the economy than by concerns that the people may be catching on that government spending is the problem not the solution. After all, besides 9.2 9.1 percent unemployment, almost no economic growth, and much more debt, what exactly do we have to show for a trillion dollars in “stimulus” spending?

Government as Consumer

Anxiety over cuts, assuming it is sincere, is unnecessary. We need not wonder what would happen if government spending were reduced because we already know. To the extent government abstains from spending, the resources it would have consumed will be available for private production. (Let’s throw in the repeal of all privilege too.) Government is a consumer of scarce resources. The promise of government investment is debunked when we understand that real market investment is a price-guided entrepreneurial commitment of resources driven by hunches about what consumers will want in the future. Assuming a freed market, whether a particular use of resources best serves consumers is eventually revealed in the profit-and-loss statement.

Although advocates of government projects try to appropriate the aura of market investment, their schemes can’t escape being acts of consumption. They are guided not by market prices and expected consumer preferences but by politicians’ wish to be reelected. The funds won’t be acquired by consent and therefore put to a market test, and the services won’t be offered on the market to free consumers with the power to say no thank you. Rather, resources will be acquired either by taxation, that is, by the threat of force, or by borrowing, which is possible only because the government has power to tax. Any resulting services will be provided not on the market but through the political process in which some are compelled to subsidize others. Costs are severed from benefits.

Value Lost

Thus we have no reason to think that government transforms resources from less-valued to more-valued forms as freed markets tend to happen to do.

Those who fear for the economy if the government fails to spend ever more money should review the near-laboratory test of their belief that took place at the end of World War II in 1945. At that time the Keynesians despaired that if government spending (and hence aggregate demand) dropped sharply after the war and government employment declined with the discharge of 10 million draftees, the economy would fall “back” into depression, complete with the high unemployment seen in the 1930s. Yet this did not happen.

Robert Higgs writes,

The unemployment rate in 1947, when the transition was nearly complete, was less than 4 percent.… The year 1946, when civilian output increased by about 30 percent, was the most glorious single year in the entire history of the U.S. economy. By 1948, real output was back on its long-run growth trend, and during the decades that followed, the economy was spared the sort of deep and long debacle that a congeries of wrongheaded government policies had caused during the 1930s.

As Higgs documents, the war did not end the Depression, unless you count consumer deprivation and eliminating unemployment through military conscription as signs of prosperity. It was the government’s retrenchment after the war that did the trick.

“In brief, the war boom as typically comprehended did not occur; nor did the corresponding ‘crash of 1946′ so evident in the standard GDP data,” Higgs writes.

The lesson then is that real and dramatic spending cuts through a radical reduction in what government does is the authentic way to stimulate economic growth, not to mention expand individual freedom.

As he wrote to Boudreaux:

You mention, though, that the government could “choose to default.” Well, if default means that you’re unable to pay, then “choosing to default” must mean that you “choose to be unable to pay.” Hey, that really does sound like government-speak. But I think a more accurate and more revealing term is “renege.”

Speaking for myself, reneging in this case would to some small extent liberate the taxpayers from an unchosen obligation, so it would not carry the moral taint that private reneging on debt obligations does

One troubling aspect of the political debate over the debt ceiling is the constant repetition of the statement that “the US has never defaulted on its debt”. On the grounds that those who fail to learn from history are due to repeat it, I would like to set the record straight…. During its 235 years as a sovereign entity the United States has defaulted on three separate occasions … and has also intentionally liquidated debt via inflation.

At least partial defaults occurred after the Revolution and in 1933 under Franklin Roosevelt:

For several decades prior to 1933, holders of Treasury securities were contractually entitled to receive interest and principal payments in either dollars or gold. At the time, many contracts contained a “gold clause”, which enabled payees to receive proceeds in the form of gold. During the 1933 banking holiday declared by President Franklin Roosevelt immediately after his March 4 inauguration, the federal government refused requests for interest payments in gold, remitting only currency instead. Congress later ratified this action by formally invalidating gold clauses….

Meanwhile, as reported in The Economist (2011, June 23), the US Treasury failed to redeem $122 million of Treasury bills on time after another debt ceiling debate in 1979. This episode was purely a technical default, arising from systems issues….

Conclusion: The US Treasury has defaulted in the past and it has a material risk of doing so again. Absent substantive budget reforms in the current debate, it is hard to see any justification for leaving the US at AAA.

Why the constant “we’ve never defaulted before” drumbeat? Who believes the answer is simple ignorance?

After paying creditors [in August], the government will have $87.8 billion on hand in ready cash in August to spend on its myriad programs — such as Social Security, wars in the Middle East, subsidized farming and maintaining a court system. With an un-raised debt ceiling preventing the federal government from borrowing more money, it will indeed be unable to fund the full range of these programs.

To renege on promises to pay subsidized farmers and other non-creditors, however, is not to default; rather, it’s to belt-tighten.

Election after election, Americans go to the polls and elect representatives who frequently promise to make the “tough choices” about allocating scarce government revenues. Now is the time to make those tough choices.

In response to questions by U.S. Senator Jack Reed (D-RI), Bernanke joined in the chorus of those predicting skyrocketing interest rates in the United States and abroad if the federal government defaulted on its debt obligations because Congress did not to raise the debt ceiling.  It is not a given that the federal government would default if the ceiling were not raised.  But ignoring that fact, Bernanke argued that the “loss of investor confidence [following debt default] could potentially raise interest rates quite significantly.… But if interest rates rise, that’s clearly going to reduce investment, uncertainty will rise, that will reduce the abilityness [sic] of firms to hire and invest.… So I can only conclude that this would be very bad for  — for jobs.”

Did the person supposedly in charge of determining interest rates in the United States through Federal Reserve credit creation really say that?  What was the rationale for QE1 and QE2 (quantitative easing) if not to lower interest rates and promote economic prosperity?  And who inspired that mistaken thinking?  John Maynard Keynes, of course.

What Keynes Argued

Keynes argued in the General Theory (1936) that interest rates are determined by the supply and demand for central-bank money (cash) and not by the supply and demand for savings (or loanable capital), as his predecessors from David Hume and Adam Smith on down to Alfred Marshall  explained.  Therefore, in Keynes’s view, it is the responsibility of a central bank to so increase its supply of money as to depress interest rates to such a low level as to result in the “euthanasia of the rentier, of the functionless investor,” who relies on “the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” to demand interest payments.  That is, money should become so plentiful that no one would be obliged to pay interest to borrow it.  (Of course, Keynes here confuses money with savings or wealth.)

Indeed, the money (cash) supply-and-demand theory of interest rates was the predominant view among the sixteenth-eighteenth-century Mercantilist thinkers.  It was to correct that mistaken view that Hume, in his essay “Of Interest,” explained that although interest rates may be influenced temporarily by the abundance or scarcity of money, they are permanently determined by the flow of savings relative to their demand:

High interest arises from three circumstances: A great demand for borrowing; little riches to supply that demand; and great profits arising from commerce [hence the desirability of demanding more loans]; And these circumstances are a clear proof of the small advance of commerce and industry, not of the scarcity of gold and silver [money].  Low interest, on the other hand, proceeds from the opposite circumstances: A small demand for borrowing; great riches to supply that demand; and small profits arising from commerce: And these circumstances are all connected together, and proceed from the increase of industry and commerce, not of gold and silver.

Keynes’s Denial

Hume’s elaboration on that point was the basis of subsequent classical writers’ explanation of interest-rate determination by the supply and demand for savings.  Keynes, on the other hand, denied all such explanation and declared in his 1939 Preface to the French edition of the General Theory that, in arguing that interest rates rather are determined by

the demand and the supply of money, that is to say [by] the demand for liquidity and the means of satisfying this demand [he is] returning to the doctrine of the older, pre-nineteenth century economists.  Montesquieu, for example, saw this truth with considerable clarity, — Montesquieu who was the real French equivalent of Adam Smith, the greatest of your [French] economists, head and shoulders above the Physiocrats in penetration, clear-headedness and good sense (which are the qualities an economist should have).

Has Bernanke now abandoned his adherence to Keynes’s money or liquidity supply-and-demand theory of interest rates, or was he merely participating in the debt-default scare to further the federal government’s agenda of raising the debt ceiling to accommodate its profligate spending?

After all, Bernanke also acknowledged to Senator Reed that besides the Chinese, the Fed is “the largest holder of our Treasury debt.”  Why wouldn’t the Fed simply cancel the Treasury’s debt and purchase some more to save the federal government from its predicted default?  To support the political-posturing view of Bernanke’s statements, one could legitimately cite his similar proclamations in fall 2008 that without Congress’s passage of TARP (Troubled Assets Recovery Program), giving the Treasury secretary $700 billion to purchase “toxic assets” mainly from investment banks, businesses couldn’t meet their payrolls.  The claim wasn’t true.  Businesses borrow from commercial banks, not investment banks, to meet payroll.  And commercial banks rely mainly on the public’s deposits to lend to businesses.  The public would not have stopped making deposits with banks had TARP not passed.  Besides, the Treasury secretary, Hank Paulson, did not use the funds immediately for the purpose the bill was passed.  But the scare worked to push Congress to vote for the legislation.

Common Sense

More likely, Bernanke simply employed the common-sense view of interest-rate determination through the supply and demand for financial assets (interest rates thus being inversely related to the price of financial assets), which is the classical economics view, in contradiction to Keynes but without consciously intending to be anti-Keynes.  Buyers of financial assets (IOUs) are the savers while sellers of financial assets are the borrowers.  Clearly, many U.S. Treasury bond holders would be inclined to sell them should a default occur.  Such selling would reduce their price and thus raise their yield (interest).  Therein lies the contradiction of Keynes and the affirmation of the classical principle he denied, namely, that the supply and demand for savings are the principal or permanent determinants of interest rates.  Bernanke couldn’t deny the obvious, even as he exaggerated the consequences of a government default.

So what if the U.S. defaulted on its debt obligations and the yield on its debt rose?  Must all interest rates rise as a result of the nonzero default risk on Treasuries?  Not necessarily.  There would simply be a narrowing of the risk premium between U.S. government bonds and other private sector securities.  Treasury securities would lose their default-risk advantage over other securities but retain their liquidity-risk advantage, given the Federal Reserve’s readiness, hence commercial banks’ readiness, to redeem Treasury securities on sight.  There is no reason why the default risk of the bonds and stocks of such corporations as Apple, Microsoft, Google, or Walmart should rise just because that of the U.S. government has risen.  Thus the yield on private securities may decline (as investors flee Treasuries) while that on U.S. government securities rises, leaving the average unchanged.

Savers are constantly looking for instruments (financial assets) through which they can earn returns on their savings.  There may be some diversion of savings into gold, driving up its price further.  But investors in gold also know that, like all other commodities, the bubble created by current fears about Treasuries would also burst in due course.  Thus the predicted skyrocketing of worldwide interest rates from a possible U.S. government debt default is an exaggeration.  If interest rates rise, it would be the result of a contraction in the rate of savings worldwide.

High Interest Rates and Economic Growth

Besides, high interest rates, as Hume explained in his 1752 essay, are not necessarily injurious to a high rate of economic growth.  It is high interest rates resulting from a contraction in savings that reduce economic growth.  One easily can verify this from the level of interest rates in the United States during the economic boom from 2003 to the fall of 2008.  The yield on a one-month Treasury rose steadily from 0.91 percent in May 2004 to 5.16 percent in June 2006 while the unemployment rate declined from 5.6 to 4.6 percent.  On the other hand, the one-month rate stood at 0.02 percent in June 2011 because of the Fed’s massive injection of credit while the economy has continued to be mired in anemic growth and the unemployment rate has risen to 9.2 percent.

Raising taxes to balance the federal budget would not necessarily lower interest rates.  Rather, higher taxes would reduce disposal income and thus the flow of savings.  The high level of government spending — financed either by debt or high taxes — rather would put pressure on interest rates to rise.  It also would divert more savings from private-sector investments that would otherwise promote sustained employment and economic growth.  These are the insights of classical macroeconomics that Keynes failed to appreciate and his modern followers continue to miss.

Current low U.S. interest rates are unsustainable.  They are going to rise with or without an increase in the federal government’s debt ceiling.  Savers will not forever endure the current negative real interest rates.  Cutting federal spending is the surer path to resumption in robust economic growth and reduction in the rate of unemployment. As David Ricardo in his 1810 pamphlet, “The High Price of Bullion,” acutely observed:

To suppose that any increased issues of the Bank [of England] can have the effect of permanently lowering the rate of interest, and satisfying the demands of all borrowers, so that there will be none to apply for new loans, … is to attribute a power to the circulating medium [money] which it can never possess.  Banks would, if this were possible, become powerful engines indeed.  By creating paper money, and lending it at three or two per cent. under the present market rate of interest, the Bank would reduce the profits on trade in the same proportion; and if they were sufficiently patriotic to lend their notes at an interest no higher than necessary to pay the expences of their establishment, profits would be still further reduced; no nation, but by similar means, could enter into competition with us, we should engross the trade of the world.  To what absurdities would not such a theory lead us!  Profits can only be lowered by a competition of capitals not consisting of circulating medium.  As the increase of Bank-notes does not add to this species of capital, as it neither increases our exportable commodities, our machinery, or our raw materials, it cannot add to our profits nor lower interest [permanently].

Experience around the world repeatedly has confirmed Ricardo’s warning against the belief in a central bank’s money creation as the engine of economic growth instead of the pursuit of policies that encourage increased private savings.

It is assumed almost universally that the U.S. government must make its interest payment and cover its other financial obligations on August 3, the day after the drop-dead date for a debt limit increase, or suffer a severe economic and moral blow. Even a late interest payment would be economically catastrophic, we’re told. (That strikes me as fear-mongering.)

Thus the debate is over how not if the debt limit is to be raised — as if a $14.3 trillion debt is not enough. Some would simply raise the limit. (President Obama wants it raised by $2.4 trillion.) Most want the new limit combined with a plan to reduce the budget deficit over the next decade.

Shrinking that deficit can be accomplished theoretically by cutting spending, increasing tax revenues, or both. I say “theoretically” because a plan to raise revenues would likely fall short of its target: Taxpayers are adept at tax avoidance, which is why for the last several decades total federal revenues have been fairly constant as a share of GDP (at just under 20 percent) regardless of tax rates. (They are lower now because of the recession.)

Lost Dimension

Throughout the political hullabaloo something important – the moral dimension — has been lost. (Now there’s a first!) It is not just that the government’s commandeering of even more resources from the private sector is regarded as the “grownup” thing to do. It’s also that most people assume the government is something noble and its word must be kept at all costs. The pundits and politicians go beyond claiming that missing the deadline would bring economic calamity; they also say that a late payment  — not a default, not a repudiation, but merely a late payment — would be a moral calamity. This is laughable, considering the endless list of lies presidents, members of Congress, and other government officials have peddled for years. Politicians have been the butt of American humor from the beginning precisely for that reason. These are the people who gave us budget cuts that are actually only reductions in the rate of increase, off-budget financing, and other creative accounting. Need I cite more examples? (If you want more, check the statements made in the run-up to any of America’s wars.)

In truth a late payment would expose government for what it is, in case anyone forgot. The lesson would be instructive. Government is not some higher super-competent entity like the man pretending to be the Wizard of Oz wanted the people to think he was. It’s a coercive organization of limited, flawed, and essentially ignorant men and women who, having been anointed in an election after campaigns hawking snake oil, are presumptuous enough to think they are capable of making wise decisions on our behalf.

There’s also a forgotten moral dimension with respect to those who receive government payments. Not all of them are of equal moral stature. While no one (except the actual owners) can deserve government largess because it originates in taxation, some claims are superior to others. Someone who lends money to the government does so freely, knowing that taxation will make repayment possible. (If you doubt this, ask yourself how many bond buyers there would be if government had no power to tax.) In contrast Social Security/Medicare recipients were financially raped all their working lives and pushed into dependence on government at a stage of life when earning an income is difficult or impossible.

Weaker Claim

If the government is going to pay somebody, whom should it be? It’s clear to me that the coerced creditors should be favored over the willing creditors. Back of the line, bondholders.

I am not justifying taxation to pay welfare state beneficiaries — quite the contrary. I am saying only that victims of the State have a stronger claim to resources in its possession than those who freely speculated in and hoped to profit from its power. (The low interest rate assumed obeisant taxpayers.) No one is punished for not buying bonds. Alas we can’t say the same for those who attempt to opt out of Social Security or Medicare.

Finally, if the government suddenly refused to pay its willing creditors (and wasn’t merely late with its payment), the world economy could be disrupted in the short term (though with big benefits later). That potential for disruption, which would surely harm innocents, might justify paying the bondholders for now — but not out of any real moral obligation to them. Among the many offenses of the political class is that finally cleaning up its economic mess is not likely to be painless.

However you come down on the matter, Mario Rizzo reminds us that higher taxes are already on the way.

Following the zigzagging negotiations isn’t easy. First the aim was a short-term deal. Then both sides decided to go for a big package: $4 trillion in deficit reduction over ten years. That broke down when Obama said a quarter or a third of that amount should come from new revenues.

When I hear about ten-year budget deals, I first divide the aggregate number by ten so I see how little is at stake each year. I also want to know if the spending reduction is real or phony. Chris Edwards of the Cato Institute says most cuts are likely to be accounting tricks. For example, Edwards shows how the Iraq/Afghanistan war budget could be “reduced” $1 trillion without cutting a penny. (Hint: Start by pretending that the budget will increase by the inflation rate in the future, then recognize that eventually troops will be withdrawn. Voila!)

I also remind myself that no Congress can bind a future Congress. Would you bet a substantial sum on a congressional promise to reduce the deficit over ten years? I didn’t think so. Even if Obama is reelected, he wouldn’t be in office for the last four years of the period.

Skepticism is justified. In the 1980s another deal was struck that supposedly would deliver $3 in spending cuts for every $1 in new revenue. Know what happened? That’s right.

No Good Tax

There are so many reasons why the government should not raise taxes or otherwise collect more revenue – even if only from “the rich” — it’s not funny. The first reason is moral. As one my predecessors at The Freeman, Frank Chodorov, used to say: “Taxation is robbery.” Chodorov winds up his article this way: “There cannot be a good tax nor a just one; every tax rests its case on compulsion.” It is sad that most self-styled lovers of humanity embrace a money-raising system grounded in the threat of physical force — violence — against people who themselves have not used force. Our moral progress in many areas cannot be doubted, nevertheless overall it has been uneven.

The presumption against taxes holds even in a corporatist economy, where fortunes are made through the political, as opposed to the economic, means. The way to end illicit gains through government intervention is to abolish the privileges. It makes no sense to continue the privileges and then tax away some of the proceeds. That merely compounds the power of government by giving it more discretion.

This argument also holds if the new revenues are to come from ending tax deductions and credits rather than raising or imposing new taxes. A plain vanilla tax system is bad enough; one that gives rulers the power to reward and punish the economic activities of their choice is worse. Yet selectively ending exemptions while leaving others in place is not true reform. Obama and the other would-be revenue raisers pretend they want to clean up the tax code by getting rid of “loopholes” but we know that’s not true. If they were serious, they’d be targeting all such exemptions not just those that make for populist-sound bites. What about all that special tax treatment for “green” technologies that Obama favors?

Spending versus Not Taxing

In recent days politicians and commentators have repeatedly said there is no difference between government’s spending money and abstaining from taxing some forms of income. But that could be true only if the government owned all income. Leaving money in someone’s pocket — even if it is done arbitrarily — is not a form of spending, however manipulative it is. But it serves the rulers’ interest to claim otherwise because it lets them say that to end an exemption is to cut spending.

Among other reasons for saying no to new taxes is that even if you think the government should have new revenues to deal with the debt, the politicians can’t be trusted to use it that way. They are much more likely to find new ways to spend the money. It’s happened many times before because that’s the nature of the system. Politicians, like real people, respond to incentives.

Here’s another reason: There aren’t enough rich people to make a big difference.

Obama has often expressed his wish to raises taxes on couples making more than $250,000. But as Kevin D. Williamson of National Review points out, there’s not enough money in that group to fix the budget.

The 2012 deficit is forecast to hit $1.1 trillion under Obama’s budget. (Thanks, Mr. President!) Spread that deficit over all the households in Club 250K and you have to jack up their taxes by an average of $500,000. Which you simply can’t do, since a lot of them don’t have $500,000 in income to seize: Most of them are making $250,000 to $450,000 and paying about half in taxes already.

Club 1

Okay, how about those making a million a year or more? That won’t work either.

Only 0.2 percent of U.S. households have incomes that high, meaning that there’s only about 200,000 of them. And like Club 250K, Club 1 is bottom-heavy: There are a lot more $1 million men than there are $6 million men. And there are a whole heck of a lot more $6 million men than there are $60 million men.

You want to tax Club 1 to get rid of the deficit, you have to hit each of those 200,000 households with an average tax hike — not an average tax bill, but tax increase — of $6 million. And a lot of those Club 1 households don’t have $6 million in income to start with, much less $6 million left after the taxes they’re already paying.

Let’s face it, as Walter Williams notes, with government spending about $10 billion a day, even confiscating the incomes and wealth of the rich and the profits of the Fortune 500 just wouldn’t get very far. It assumes, contrary to experience, that the rich will be stationary targets rather than find ways to shelter income, even moving it offshore. In the postwar period, federal revenues have remained remarkably steady as a percentage of GDP regardless of tax rates.

There’s an unsettling message buried in all this. A big-spending government will have to stick it to the middle class. That’s where the money is. But it won’t fix the deficit. According to National Review‘s Williamson:

The Bush “tax cuts for the rich” cost the Treasury about $800 billion in forgone revenue; the Bush tax cuts for the middle class cost trillions — 2.2 of them, to be precise.

Repealing all of those Bush tax cuts, for rich and middle class alike, gets you about $3 trillion — over ten years. The deficit is running from a third to almost half that every year.

So the only way back away from the brink is to cut spending — by eliminating missions wholesale. But politicians don’t really want to cut spending. Hence, the problem.