Balanced budget orthodoxy in the United States will keep the poorest parts of the U.S. relatively impoverished. And not because of reduced federal spending. Quite the opposite.
Peter Bauer (1915-2002), a Hungarian-born British economist, and winner of the libertarian Cato Institute’s first Milton Friedman Prize for Advancing Liberty, would know why. Bauer was awarded by Cato for his foreign aid work. He showed that recipients of it didn’t prosper from it. Which, when you think about it, really isn’t surprising.
No individual, no business, and no government ever runs out of money as much each runs out of private investor trust in their ability to prosper in the future. There’s your answer for why foreign aid never, ever works: it perpetuates the legislative errors and corruption that render certain countries recipients of the aid in the first place.
From there, it’s a public choice problem that Washington Post editorial columnist Shadi Hamid touched on in his 2022 book, The Problem of Democracy (review here). In it, Hamid quotes a Muslim Brotherhood type asking Hamid “why would the West help Egypt become a powerful country, so that Egypt becomes independent and not needing the U.S.?” Why indeed?
Foreign aid fails because those doling it out can’t succeed in total lest they no longer have nations to aid. Of course, what the alleged beneficiaries of public choice theory miss is that they needn’t worry about succeeding. Exactly because foreign aid makes it possible for countries to avoid the very change that would attract private investment over aid, government funding fails always and everywhere. Bauer was right, while also stating the obvious. Yet there’s more.
While the failures of foreign aid are frequently the focus, what about domestic aid? It’s a crucial question considering the variances in prosperity within countries. Memphis and Nashville are both cities in Tennessee, but Nashville’s present and future greatly exceeds that of Memphis. Within California, El Monte in no way resembles Palo Alto. West Virginia has long looked up to California, and on and on.
This is important in consideration of federal spending, along with federal spending directed to the poorest U.S. states. As West Virginians know well, the name Robert Byrd can be found all over the Mountain State thanks to all the federal money the powerful senator secured for West Virginia over the decades. To its detriment.
That’s because domestic aid fails for the same reason that foreign aid does. It’s the perpetuation of what’s not working. Americans suffered the previous truth via the New Deal in the 1930s. Recessions cleanse, thus setting the stage for much better, only for President Roosevelt to use the federal government to delay the cleanse. In doing so, he prolonged the pain.
Which brings us to balanced budgets, and the likelihood that Bauer wouldn’t approve. Presently, the U.S. has $38 trillion in debt. The latter signals soaring federal tax revenue in future. What this tells us about the future is that even with budgetary balance, the size of future U.S. budgets will be enormous.
Which means federal funding of the poorest U.S. states will grow, and with the growth, so will a delay in economic recovery for those states that will only happen insofar as investment replaces aid. The problem for now is that federal aid is perpetuating the very mistakes that make investment less abundant.
Bauer would understand the folly of budgetary balance for the same reason that he knew foreign aid harmed its recipients. With Bauer in mind, let’s not continue to do for the poorest parts of the U.S. what U.S. aid has consistently done for the rest of the world.
