The Ratchet Effect

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The Ratchet Effect

by Ari Armstrong, March 25, 2005

Colorado's Democratic legislature and Republican governor want to spend an additional $1.8 to $3.1 billion over the next five years, on top of the increases that the Taxpayer's Bill of Rights (TABOR) would otherwise allow, the Rocky Mountain News has reported. Colorado's population is about 4.7 million, so at the lower estimate the net tax hike will average about $1,500 for a family of four over the five-year period.

According to the Rocky Mountain News, Democrat Colorado Senate President Joan Fitz-Gerald said, "If we lived in anticipation and fear of [TABOR author] Douglas Bruce we would do nothing. We would provide no services. We would have a state that essentially turned into a Third World nation. And I'm not willing to live that way."

Either Fitz-Gerald is extremely careless in her use of hyperbole, or she is completely ignorant of basic economics.

Jon Caldara, President of the Independence Institute, has noted that if current TABOR limitations are kept in place, state legislators would need to cut state spending less than 1.5 percent of the total state budget. Cuts of less than 1.5 percent would not result in "no services," as Fitz-Gerald so breathlessly asserts. Such cuts would keep services practically the same, especially if legislators found ways to cut waste, as a report by the Independence Institute urges.

But Fitz-Gerald's comment about Third World nations is even more troubling. Her statement implies that the reason nations become prosperous is that their governments keep spending more and more money. Her view is the exact opposite of the truth.

The Heritage Foundation reports in its 2005 Index of Economic Freedom that "the key to prosperity... can be summed up in one word: Freedom... [T]he annual country-by-country report on the openness of economies worldwide demonstrates that the countries with the greatest degrees of economic freedom also enjoy the highest living standards."

One of the report's 10 measures of economic freedom is the "fiscal burden of government." In other words, generally the more restrained a country's politicians are in spending, the more prosperous the country.

To be sure, another of the 10 measures of freedom is property rights. And the protection of property rights requires a proactive government. We need police and detectives to help protect us from violent criminals and defrauders. We need courts to track property claims and settle disputes. We need fair rules that prevent one party from dumping pollution on the property of another.

While road construction is best paid for with fees that closely track usage, such as the gasoline tax accomplishes to a large degree and toll road fees do an even better job of, at least extra state spending on roads generally gives each taxpayer value for his or her money.

But the Colorado Government can fund such services without spending more of our money. The Taxpayer's Bill of Rights already allows generous annual increases in state spending for population growth plus inflation, which allows more than enough funds to cover core projects.

Every year Colorado's politicians redistribute billions of dollars. For example, the legislature transfers more than a billion dollars for health care and more than half a billion dollars for higher education. (This spending includes a subsidy for Ward Churchill, the professor at CU who rationalized the mass slaughter of Americans.) While the merits of such wealth redistribution may be debated, such spending does not contribute to Colorado's net prosperity. Such spending benefits a few at the expense of the many, and it involves significant loss of prosperity due to the costs incurred in transferring the money and bureaucratic waste.

What then is essential to economic growth? In a word, it is investment. Now, Fitz-Gerald would argue that the state's redistribution of wealth counts as "investment," but this ignores the obvious point that state spending takes money out of one pocket and puts it in another, minus expenses. Higher state spending necessarily means lower personal spending. For example, for every dollar the state takes from you to pay for somebody else's college education, you have one less dollar to spend on your own education, retirement fund, etc.

Those who want more wealth redistribution complain about TABOR's so-called "ratchet effect." That means that during an economic downturn the state may not spend the maximum that TABOR would otherwise allow, and thus the baseline for the next year's spending increase is slightly lower. While total state spending has increased every year under TABOR and is expected to keep increasing, the economic downturn has required cuts in some areas. The "ratchet effect" was built into TABOR on purpose, and it's an effective way to limit the growth of government during a troubled economy.

But the truly dangerous "ratchet effect" is the one caused by profligate state spending. Every dollar the state spends is a dollar less in the pockets of taxpayers, so wasteful and unnecessary state spending cuts personal spending and investment and thus limits economic growth. For every single year that politicians waste money, the economy suffers, and it remains smaller than it otherwise would have been for every year into the future.

Though Fitz-Gerald tries to provoke an irrational fear of the Taxpayer's Bill of Rights, citizens interested in the real world should praise TABOR for limiting the "ratchet effect" of wasteful politicians.


The Independence Institute
13952 Denver West Parkway, Suite 400
Golden, CO 80401
303-279-6536

INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.

JON CALDARA is the President of the Independence Institute.

ARI ARMSTRONG edits FreeColorado.com, and he voted for John Kerry.

NOTHING WRITTEN here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.

PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the Independence Institute.

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