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The Coming Economic Insolvency
#1
I don't think there are many here, who refuse to believe the US is swiftly heading down the track to fiscal, and monetary, insolvency. The president, congress, and the Fed have been doing practically everything possible to ruin things. Here is one great example. Do we have any business spending billions on this issue, which does not really affect us?

But check out this seemingly astute contradiction: US Approaching Insolvency, Fix To Be 'Painful': Fisher.

Quote:The United States is on a fiscal path towards insolvency and policymakers are at a "tipping point," a Federal Reserve official said on Tuesday.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

"The short-term negotiations are very important, I look at this as a tipping point."

But he added he was confident in the Americans' ability to take the right decisions and said the country would avoid insolvency.

"I think we are at the beginning of the process and it's going to be very painful," he added.

Fisher earlier said the US economic recovery is gathering momentum, adding that he personally was extremely vigilant on inflation pressures.

Fisher added that the U.S. Federal Reserve had ways to tighten its monetary policy other than interest rates, including by selling treasuries, changing reserves levels and using time deposits.

Does anyone look surprised that a Fed grand poo-baa would make such a statement, which on the surface seems to be so salient? At first blush, it would appear that he is throwing accusations at everyone, right?

Well, look between the lines here, and see how CYA is being practiced, so the Fed will hold itself above the fray. here is the part I am referring.

Quote:"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when,"

Bill, and perhaps a few others here will immediately see the point. But let me point it out: the Fed is responsible for Monetary policy. And the president/congress is responsible for Fiscal policy. And he is clearly pointing the finger at the later, not himself and The Beranke, who are constantly adding liquidity to the sagging economy, in true Keynesian tradition.

As I love to point out, Fisher is also guilty of Projection, in that he is attempting to blame others for his/and his boss's, almost total irresponsibility on monetary policy, which is just as dangerous as the overspending part.

And that is why we are going to Carsh and Burn soon, and nobody is going to be willing to shoulder any part of the blame for it.

Amazing!
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#2
Here is an interesting position paper, from Harvard, on how to Optimal Monetary and Fiscal Policy during Economic Decline. It's quite detailed, and right up the alley for Brooklyn to study.

Here is a short rundown of the main points:

Quote:Optimal Monetary and Fiscal Policy during Economic Decline

A new research paper by N. Gregory Mankiw, a professor of economics at Harvard University, and Matthew Weinzierl, an assistant professor at Harvard University, explores the optimal monetary and fiscal policy for an economy experiencing a shortfall in aggregate demand. Their model is simple enough to be tractable yet rich enough to offer some useful guidelines for policymakers, according to Mankiw and Weinzierl.

One clear implication of the analysis is that how any policy is used depends on which other policy instruments are available. It is fair to say that there is a hierarchy of instruments for policymakers to take off the shelf when the economy has insufficient aggregate demand to maintain full employment of its productive resources.

The first level of the hierarchy applies when the economy does not face the zero lower bound for nominal interest rates.

-In this case, conventional monetary policy is sufficient to restore the economy to full employment.
-That is, all that is needed is for the central bank to cut the short-term interest rate.

The second level of the hierarchy applies when the short-term interest rate hits against the zero lower bound.

-In this case, unconventional monetary policy becomes the next policy instrument to be used to restore full employment.
-A reduction in long-term interest rates may be sufficient when a cut in the short-term interest rate is not.

The third level of the hierarchy is reached when monetary policy is severely constrained.

-In this case, fiscal policy may play a role.
-Fiscal policy should aim at incentivizing interest-sensitive components of spending, such as investment.

The fourth level of the hierarchy is reached when monetary policy is severely constrained and fiscal policymakers rely on only a limited set of fiscal tools. If targeted tax policy is for some reason unavailable, then policymakers may want expand aggregate demand by increasing government spending, as well as cutting the overall level of taxation to encourage consumption, say Mankiw and Weinzierl.

Source: N. Gregory Mankiw and Matthew Weinzierl, "An Exploration of Optimal Stabilization Policy," Harvard University, March 8, 2011.
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#3
Quote:Outrage: Freddie and Fannie Execs Pocketed $35 Million In Taxpayer Money

Top executives at Fannie Mae and Freddie Mac were paid more than $35 million in the past two years while the two bailed-out mortgage finance giants were receiving $153 billion in support from taxpayers.

The huge payouts came to light in a new report published on Thursday by the Federal Housing Finance Agency’s Office of Inspector General.

“Although the Enterprises [Fannie Mae and Freddie Mac] have lost billions of dollars and continue to depend upon federal support to remain in business,” the reported states, “their senior executives continue to receive multi-million dollar salaries.”

At Fannie Mae [Federal National Mortgage Association], its chief executive officer received $9.3 million in total compensation in 2009 and 2010, the report reveals. The CEO is Michael J. Williams, who joined the company in 1991.

At Freddie Mac [Federal Home Loan Mortgage Association], CEO Charles E. Haldeman Jr., former head of Putnam Investments, made $7.8 million in the two years since the company was taken over by the federal government.

Fannie Mae’s chief financial officer made $4.6 million, and its chief accounting officer/general counsel received $4.5 million.

At Freddie Mac, the CFO made $3.9 million, and the general counsel/secretary received $5.1 million.

In all, the top six executives made $35.4 million. Meanwhile, total losses at the two companies could reach $363 billion through 2013, according to government estimates.

The pay was approved by the Federal Housing Finance Agency, which is charged with conserving the assets of Fannie and Freddie on behalf of taxpayers, the New York Times noted on Friday.

The FHFA “has a responsibility to Congress and taxpayers to efficiently, consistently, and reliably ensure that the compensation paid to Fannie Mae’s and Freddie Mac’s senior executives is reasonable,” said Steve A. Linick, the newly appointed inspector general of the agency, in a statement.

“This is especially true when you realize that the U.S. Treasury has invested close to $154 billion to stabilize Fannie Mae and Freddie Mac,” and they “are spending tens of millions of dollars for executive compensation.”

The report pointed to a “lack of standardized evaluation criteria, documentation of management procedures and internal controls” at the oversight agency.

It also noted that the executives were paid far more than their counterparts at other federal housing agencies. The top executive at Ginnie Mae, for example, received an annual salary of less than $200,000.

The inspector general recommended that the FHFA “should establish written criteria and procedures for reviewing performance data, and conduct independent verification and testing of the basis for executive compensation levels. These factors may warrant lower compensation for Enterprise executives.

“Also, to improve transparency, FHFA should post on its website information about executive compensation.”

Brian Foley, a compensation consultant, told The Times that a “fair portion” of the executives’ compensation is paid “without regard to performance.

“If anybody needs to have good long-term performance, isn’t it Fannie Mae and Freddie Mac?”

Great example, run a company into the ground and get rewarded.
The true purpose of democracy is not to select the best leaders — a clearly debatable obligation — but to facilitate the prompt and peaceful removal of obviously bad ones. 
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#4
Stephen Moore weighs in:

We've Become a Nation of Takers, Not Makers

Quote:If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods.

and the article continues with examples and detail.

And the Republicans in congress are about to accept only a 66B budget cut in their negotiations with the senate???
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#5
WarBicycle Wrote:Great example, run a company into the ground and get rewarded.

Yeah, it's thoroughly outrageous, isn't it? That's Big Government for you.

I wonder if Buzz will be upset if he finds out about this? Or will he demand he get his 'quota'?




jt Wrote:And the Republicans in congress are about to accept only a 66B budget cut in their negotiations with the senate???

And that is why I call them both part of the Same Party: The Big Government Party. Don't you just love them both?

Hey Bill, what do you still think of your Republican Wing of the Big Government Party? Do you still think they are going to ride in and save the country form Evil Statist Elitists, who have a home in DC?

You listen to Mark Levin: what is he saying about all this? I don't mean to give you so much grief about this personally, because you are my friend. But you have nothing but positive, and wonderful, things to say about them. I'm hoping and waiting for your resolve to finally crack,.......when you finally decide "Enough!" for a change.

Personally, it's time for a new party IMO. Screw the Big Government Party: Both Wings. :evil:
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#6
No, I don't have only positive things to say about them, but I make the distinction between the potential of our leverage with working with them rather than dissing them at all turns which only aids the Democrat Agenda.

Paul Ryan is establishing the 2012 budget which addresses entitlements, not just the paltry discretionary items being discussed now. Michelle Bachmann, Rand Paul, and many of the new cut-to-the-bone wing of the party are fighting for exactly what we say we want.

If there was a way to vault them over the intransigents in the party holding leadership positions without losing basic political power against the Left, then that is the goal.

The problem with attacking those who are politicians first and servants of the people second, is that they do hold part of the power that needs to be wielded. They react out of fear of the next election filtered to them through a Democrat-complicit media and union-based Democrat feet on the street.

The unions are being subjugated by the Tea Party, but the Democrats and media are doing what they can to battle back.

The correct answer is to target the issues and make the politicians attach themselves to what the majority supports. Targeting Boehner and the echelon of oldtimers who quake at their own shadows makes them retreat into the fuzzy-warm of false bipartisanship to silence the media.

Target the issues and the leadership will follow. Helping the Democrats fracture the party only hurts the effort overall.

Remember that the negative attention given to those who hold bad ideology may move them away from the position you prefer they support. We want those like Bachmann and Rand as well as the Boehners and Cantors to hoe the same line and follow our lead.

Your decision: build a party that works the way we want it to - or become an enranged fringe group that divides and lessens any motivation for the sea change we want. Your task? To show the nose-counters in the party that the way to hold power is to turn to us - not away from us.
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#7
Now this is going to be fun to watch. I wonder how long Ryan's proposal will last before it falls apart, due to DC politics?
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#8
Sounds like Ryan has war-gamed the potential response pretty well. He has put out many red herrings for the Democrats to latch onto without looking at them deeply enough, so they will respond with knee jerk "lies and Demagoguery."

The natural talking point is that Obama has added $4.5 Trillion to the Red ink side since he was elected, and getting back to 2008 levels would get us using black ink again. This ties in with raising the spending limit - because denying it would be most practical if we are looking at 2008 bookkeeping.

Ryan is one of the brightest lights in the GOP and him being in charge is a very good thing. While Schumer is out there stepping on cow flops and landmines, Ryan has a map through the minefields. What's neat is that the pathway is no secret but will catch all the Democrats anyway. It's take a step forward then one to the right. Take another step forward and move to the right. They'll get their lefty feet blown off.
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#9
We'll see Bill. Still the eternal optimist, eh?
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#10
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#11
Does anyone remember the song that begins with:
"We sing, we sing, we sing of Lydia Pinkham, and the good she did for the human race."

It concerned some elixir of the turn of the last century, undoubtedly good for the liver and whatever.

A modern version for Professor Obama would be timely.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#12
Does anyone remember the song that begins with:
"We sing, we sing, we sing of Lydia Pinkham, and the good she did for the human race."

It concerned some elixir of the turn of the last century, undoubtedly good for the liver and whatever.

A modern version for Professor Obama would be timely.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#13
And of course, not to worry about any up coming insolvency here, our government is having a grand time in Libya too. Here is The Cost of Military Ops in Libya. And just think of what we are spending elsewhere.

Sort of makes you want to pretend you are the GEICO Piggy for a little while, doesn't it?

[Image: geico_piggy.jpg]
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#14
And of course, not to worry about any up coming insolvency here, our government is having a grand time in Libya too. Here is The Cost of Military Ops in Libya. And just think of what we are spending elsewhere.

Sort of makes you want to pretend you are the GEICO Piggy for a little while, doesn't it?

[Image: geico_piggy.jpg]
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#15
Ok, here comes the "official" countdown to the up-coming debt bomb:U.S. credit rating outlook lowered by S&P. But not to worry:Obama Plays Down S&P Outlook Change.



Quote:The Obama administration moved swiftly Monday to downplay ratings agency Standard & Poor's downgrade of its U.S. credit outlook, calling the decision a political judgment that should not be taken too seriously.

So, what is the strategy:

1. Pan S&P.

2) Praise Moody's.

3) Express optimism.

4) Buy time.


They left out a fifth one: 5.) Spend like there is no tomorrow.



Meanwhile the Bomb keeps ticking.........................................
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#16
It's easier to attack the messenger than it is to address the message.
I know you think you understand what you thought I said,
but I'm not sure you realize that what you heard is not what I meant!
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#17
Here is an essay, by the late Henry Hazlitt, which addresses the thing the S&G downgrade is doing.

Quote:What Spending and Deficits Do

Henry Hazlitt, noted economist, author, editor, reviewer and columnist, is well known to readers of the New York Times, Newsweek, The Freeman, Barron’s, Human Events and many others. Best known of his books are Economics in One Lesson, The Failure of the “New Economics,” The Foundations of Morality, and What You should Know About Inflation.

The direct cause of inflation is the issuance of an excessive amount of paper money. The most frequent cause of the issuance of too much paper money is a government budget deficit.

The majority of economists have long recognized this, but the majority of politicians have studiously ignored it. One result, in this age of inflation, is that economists have tended to put too much emphasis on the evils of deficits as such and too little emphasis on the evils of excessive government spending, whether the budget is balanced or not.

So it is desirable to begin with the question, What is the effect of government spending on the economy–even if it is wholly covered by tax revenues?

The economic effect of government spending depends on what the spending is for, compared with what the private spending it displaces would be for. To the extent that the government uses its tax-raised money to provide more urgent services for the community than the taxpayers themselves otherwise would or could have provided, the government spending is beneficial to the community. To the extent that the government provides policemen and judges to prevent or mitigate force, theft, and fraud, it protects and encourages production and welfare. The same applies, up to a certain point, to what the government pays out to provide armies and armament against foreign aggression. It applies also to the provision by city governments of sidewalks, streets, and sewers, and to the provision by States of roads, parkways, and bridges.

But government expenditure even on necessary types of service may easily become excessive. Sometimes it may be difficult to measure exactly where the point of excess begins. It is to be hoped, for example, that armies and armament may never need to be used, but it does not follow that providing them is mere waste. They are a form of insurance premium; and in this world of nuclear warfare and incendiary slogans it is not easy to say how big a premium is enough. The exigencies of politicians seeking re-election, of course, may very quickly lead to unneeded roads and other public works.

Welfare Spending

Waste in government spending in other directions can soon become flagrant. The money spent on various forms of relief, now called “social welfare,” is more responsible for the spending explosion of the U.S. government than any other type of outlay. In the fiscal year 1927, when total expenditures of the federal government were $2.9 billion, a negligible percentage of that amount went for so-called welfare. In fiscal 1977, when prospective total expenditures have risen to $394.2 billion-136 times as much–welfare spending alone (education, social services, Medicaid, Medicare, Social Security, veterans benefits, etc.) comes to $205.3 billion, or more than half the total. The effect of this spending is on net balance to reduce production, because most of it taxes the productive to support the unproductive.

As to the effect of the taxes levied to pay for the spending, all taxation must discourage production to some extent, directly or indirectly. Either it puts a direct penalty on the earning of income, or it forces producers to raise their prices and so diminish their sales, or it discourages investment, or it reduces the savings available for investment; or it does all of these.

Some forms of taxation have more harmful effects on production than others. Perhaps the worst is heavy taxation of corporate earnings. This discourages business and output; it reduces the employment that the politicians profess to be their primary concern; and it prevents the capital formation that is so necessary to increase real productivity, real income, real wages, real welfare. Almost as harmful to incentives and to capital formation is progressive personal income taxation. And the higher the level of taxation the greater the damage it does.

Disruption of the Economy

Let us consider this in more detail. The greater the amount of government spending, the more it depresses the economy. In so far as it is a substitute for private spending, it does nothing to “stimulate” the economy. It merely directs labor and capital into the production of less necessary goods or services at the expense of more necessary goods or services. It leads to malproduction. It tends to direct funds out of profitable capital investment and into immediate consumption. And most “welfare” spending, to repeat, tends to support the unproductive at the expense of the productive.

But more importantly, the higher the level of government spending, the higher the level of taxation. And the higher the level of taxation, the more it discourages, distorts, and disrupts production. It does this much more than proportionately. A 1 per cent sales tax, personal income tax, or corporation tax would do very little to discourage production, but a 50 per cent rate can be seriously disruptive. Just as each additional fixed increment of income will tend to have a diminishing marginal value to the receiver, so each additional subtraction from his income will mean a more than proportional deprivation and disincentive. The adjective “progressive” usually carries an approbatory connotation, but an income tax can appropriately be called “progressive” only in the sense that a disease can be called progressive. So far as its effect on incentives and production are concerned, such a tax is increasingly retrogressive or repressive.

Total Spending the Key

Though, broadly speaking, only a budget deficit tends to lead to inflation, the recognition of this truth has led to a serious underestimation of the harmfulness of an exorbitant level of total government spending. While a budget balanced at a level of $100 billion for both spending and tax revenues may be acceptable (at, say, 1977′s level of national income and dollar purchasing power), a budget balanced at a level above $400 billion may in the long run prove ruinous. In the same way, a deficit of $50 billion at a $400 billion level of spending is far more ominous than a deficit of the same size at a spending level of $200 billion.
An exorbitant spending level, in sum, can be as great or a greater evil than a huge deficit. Everything depends on their relative size, and on their combined size compared with the national income.

Let us look first at the effect of a deficit as such. That effect will depend in large part on how the deficit is financed. Of course if, with a given level of spending, a deficit of, say, $50 billion is then financed by added taxation, it ceases by definition to be a deficit. But it does not follow that this is the best course to take. Whenever possible (except, say, in the midst of a major war) a deficit should be eliminated by reducing expenditures rather than by increasing taxes, because of the harm the still heavier taxes would probably do in discouraging and disorganizing production.

It is necessary to emphasize this point, because every so often some previous advocate of big spending suddenly turns “responsible,” and solemnly tells conservatives that if they want to be equally responsible it is now their duty to “balance the budget” by raising taxes to cover the existing and planned expenditures. Such advice completely begs the question. It tacitly assumes that the existing or planned level of expenditures, and all its constituent items, are absolutely necessary, and must be fully covered by increased taxes no matter what the cost in economic disruption.

We have had 39 deficits in the 47 fiscal years since 1931. The annual spending total has gone up from $3.6 billion in 1931 to $394.2 billion-110 times as much–in 1977. Yet the argument that we must keep on balancing this multiplied spending by equally multiplied taxation continues to be regularly put forward. The only real solution is to start slashing the spending before it destroys the economy.

Two Ways to Pay

Given a budget deficit, however, there are two ways in which it can be paid for. One is for the government to pay for its deficit outlays by printing and distributing more money. This may be done either directly, or by the government’s asking the Federal Reserve or the private commercial banks to buy its securities and to pay for them either by creating deposit credits or with newly issued inconvertible Federal Reserve notes. This of course is simple, naked inflation.

Or the deficit may be paid for by the government’s selling its bonds to the public, and having them paid for out of real savings. This is not directly inflationary, but it merely leads to an evil of a different kind. The government borrowing competes with and “crowds out” private capital investment, and so retards economic growth.

Let us examine this a little more closely. There is at any given time a total amount of actual or potential savings available for investment. Government statistics regularly give estimates of these. The gross national product in 1974, for example, is given as $1,499 billion. Gross private saving was $215.2 billion-14.4 per cent of this–of which $74 billion consisted of personal saving and $141.6 billion of gross business saving. But the Federal budget deficit in that year was $11.7 billion, and in 1975 $73.4 billion, seriously cutting down the amount that could go into the capital investment necessary to increase productivity, real wages, and real long-run consumer welfare.

Sources and Uses of Capital

The government statistics estimate the amount of gross private domestic investment in 1974 at $215 billion and in 1975 at $183.7 billion. But it is probable that the greater part of this represented mere replacement of deteriorated, worn-out, or obsolete plant, equipment, and housing, and that new capital formation was much smaller.

Let us turn to the amount of new capital supplied through the security markets. In 1973, total new issues of securities in the United States came to $99 billion. Of these, $32 billion consisted of private corporate stocks and bonds, $22.7 billion of state and local bonds and notes, $1.4 billion of bonds of foreign governments, and $42.9 billion of obligations of the U.S. government or of its agencies. Thus of the combined total of $74.9 billion borrowed by the U.S. government and by private industry, the government got 57 per cent, and private industry only 43 per cent.

The crowding-out argument can be stated in a few elementary propositions.

1. Government borrowing competes with private borrowing.
2. Government borrowing finances government deficits.
3. What the government borrows is spent chiefly on consumption, but what private industry borrows chiefly finances capital investment.
4. It is the amount of new capital investment that is chiefly responsible for the improvement of economic conditions.

The possible total of borrowing is restricted by the amount of real savings available. Government borrowing crowds out private borrowing by driving up interest rates to levels at which private manufacturers who would otherwise have borrowed for capital investment are forced to drop out of the market.

Why the Deficits?

Yet government spending and deficits keep on increasing year by year. Why? Chiefly because they serve the immediate interests of politicians seeking votes, but also because the public still for the most part accepts a set of sophistical rationalizations.

The whole so-called Keynesian doctrine may be summed up as the contention that deficit spending, financed by borrowing, creates employment, and that enough of it can guarantee “full” employment. The American people have even had foisted upon them the myth of a “full-employment budget.” This is the contention that projected Federal expenditures and revenues need not be, and ought not to be, those that would bring a real balance of the budget under actually existing conditions, but merely those that would balance the budget if there were “full employment.”

To quote a more technical explanation (as it appears, for example, in the Economic Report of the President of January, 1976): “Full employment surpluses or deficits are the differences between what receipts and expenditures are estimated to be if the economy were operating at the potential output level consistent with a 4 per cent unemployment” (p. 54).

A table in that report shows what the differences would have been for the years 1969 to 1975, inclusive, between the actual budget and the so-called full employment budget. For the calendar year 1975, for example, actual receipts were $283.5 billion and expenditures $356.9 billion, leaving an actual budget deficit of $73.4 billion. But in conditions of full employment, receipts from the same tax rates might have risen to $340.8 billion, and expenditures might have fallen to $348.3 billion, leaving a deficit not of $73.4 billion but only of $7.5 billion. Nothing to worry about.

Priming the Pump

Nothing to worry about, perhaps, in a dream world. But let us return to the world of reality. The implication of the full-employment budget philosophy (though it is seldom stated explicitly) is not only that in a time of high unemployment it would make conditions even worse to aim at a real balance of the budget, but that a full-employment budget can be counted on to bring full employment.

The proposition is nonsense. The argument for it assumes that the amount of employment or unemployment depends on the amount of added dollar “purchasing power” that the government decides to squirt into the economy. Actually the amount of unemployment is chiefly determined by entirely different factors–by the relations in various industries between selling prices and costs, between particular prices and particular wage-rates; by the wage-rates exacted by strong unions and strike threats; by the level and duration of unemployment insurance and relief payments (making idleness more tolerable or attractive); by the existence and height of legal minimum-wage rates, and so on. But all these factors are persistently ignored by the full-employment budgeteers and by all the other advocates of deficit spending as the great panacea for unemployment.

One-Way Formula

It may be worth while, before we leave this subject, to point to one or two of the practical consequences of a consistent adherence to a full employment-budget policy. In the twenty-eight years from 1948 to 1975 inclusive, there were only eight in which unemployment fell below the government target-level of 4 per cent. In all the other years the full-employment-budgeteers (perhaps we should call them the fulembudgers for short) would have prescribed an actual deficit. But they say nothing about achieving a surplus in the full-employment years, much less about its desirable size. Presumably they would consider any surplus at all, any repayment of the government debt, as extremely dangerous at any time. So a prescription for full-employment budgeting might not produce very different results in practice from a prescription for perpetual deficit.

Perhaps an even worse consequence is that as long as this prescription prevails, it can only act to divert attention from the real causes of unemployment and their real cure.

Perhaps a word needs to be said about the fear of a surplus that has developed in recent decades–ever since about 1930, in fact. This of course is only the reverse side of the myth that a deficit is needed to “stimulate” the economy by “creating purchasing power.” The only way in which a surplus could do even temporary harm would be by bringing about a sudden substantial reduction in the money supply. It could do this only if the bonds paid off were those held by the banking system against which demand deposits had been created. But in 1976, out of a gross public debt of $620.4 billion, $92.3 billion were held by commercial banks and $94.4 billion by Federal Reserve banks. This left $433.7 billion, or about 70 per cent, in nonbanking hands. This could be retired, say over fifty years, without shrinking the money supply in the least. And if the public debt were retired at a rate of $5 billion or $10 billion a year, private holders would have that much more to invest in private industry.

The Phillips Curve

A myth even more pernicious than the full-employment budget, and akin to it in nature, is the Phillips Curve. This is the doctrine that there is a “trade-off” between employment and inflation, and that this can be plotted on a precise curve–that the less inflation, the more unemployment, and the more inflation the less unemployment. But this incredible doctrine is more directly related to currency issue than to government spending and deficits, and can best be examined elsewhere.

In conclusion: Chronic excessive government spending and chronic huge deficits are twin evils. The deficits lead more directly to inflation, and therefore in recent years they have tended to receive a disproportionate amount of criticism from economists and editorial writers. But the total spending is the greater evil, because it is the chief political cause of the deficits. If the spending were more moderate, the taxes to pay for it would not have to be so oppressive, so damaging to incentive, so destructive of employment and production. So the persistence and size of deficits, though serious, is a derivative problem; the primary evil is the exorbitant spending, the Leviathan “welfare” state. If the spending were brought within reasonable bounds, the taxes to pay for it would not have to be so burdensome and demoralizing, and politicians could be counted on to keep the budget balanced.
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#18
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#19
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