Friday, July 29, 2011

The problem with deficits...

Margaret Thatcher famously stated that "the problem with socialism is that eventually you run out of other people's money." Ever since, conservatives have parroted her observation with smug approval. Conservatives also sneer at socialist ideology that assumes people can legitimately vote themselves the right to someone else's money. Despite their indignation, most of these so-called conservatives should be recognized for the hypocrites they are.

Redistributivist government programs, by design, forcibly seize property from some people in order to give it to others. Conservatives recognize that this is inherently unfair and counterproductive. But most people fail to recognize that every last dollar of deficit spending does the exact same thing.

Deficit spending is not an alternative to higher taxation. Deficit spending is higher taxation. It's also inherently socialist.

Our national debt represents things Americans previously wanted but were unwilling to pay for. Unfortunately, deficits are more politically palatable than higher taxes. As a result, Americans have chosen to use deficit spending to force future generations to pay for their current desires - without their consent. Americans spent staggering amounts of "other people's money" on unnecessary and counteproductive warfare and welfare - foreign, domestic ... even corporate. Now we have hundreds of trillions of dollars in unfunded liabilities and debt to show for it. This debt represents the biggest examples of both taxation without representation and involuntary wealth redistribution in the history of the world.

Americans have always known that somehow, someday, someone will have to pay off our debt. The "somehow" will be higher taxes, inflation, and a lower standard of living. "Someday" is coming soon. But more Americans are starting to realize that "someone" is no longer the vague abstraction it was to past generations.

It is us.

Thursday, July 28, 2011

My thoughts on the debt limit

At the moment, there is a lot of panic regarding whether or not to raise the statutory $14.2 trillion federal debt limit. This debt limit is a toothless, artificial, self-imposed cap that Congress can (and almost invariably does) increase any time it wants. This limit can be described as “borrowing limit” that Congress imposes on the federal government.

This limit is analogous to a person promising himself that he will never weigh more than 200 pounds, but who nonetheless gains weight after eating too much and exercising too little. When he approaches 200 pounds, rather than changing his bad habits, he simply changes his goal to never weighing more than 210 pounds, then 220, 240, and so on. Unless something changes, he will eventually weigh 500 pounds.

While I’m concerned about the “borrowing limit,” my concern is based on the much more serious threat posed by another debt limit looming over our country. Every credit transaction requires both a creditor and a debtor, and a debtor cannot borrow money without a creditor willing to loan it to him. When creditors become concerned about a party’s ability to repay their debt, creditors demand higher interest rates to compensate for higher degree of risk they assume by lending money. If a party’s financial condition becomes bad enough that they cannot pay off their debts, they have reached the “lending limit” at which creditors will no longer loan them money.

Unlike the $14.2 trillion borrowing limit, America’s “lending limit” will not be self-imposed. Rather, it will be imposed on us by our creditors when they are no longer willing to lend us any more money. At that point, the only way Congress will be able to raise that limit is by restoring confidence that the debt will be paid off. Doing so would require massive reductions in our deficit. Greece, Spain, Ireland, Britain, Italy, etc. are dealing with this to varying degrees right now. Our turn will come.

I support spending cuts to reduce our debt, because I believe higher taxes would make this problem worse, not better. Others disagree, and want higher taxes. Even if people disagree as to the amount, everyone should understand that some amount is too much, whether it is $14.3 trillion, $30 trillion, $100 trillion, or $1.5 (whatever comes after trillion). The national debt has been increasing every single year for decades. Unless something changes, we will hit the second limit.

Cutting back will be hard. I understand that, and don't like it. But the longer we wait to address our debt, the worse it will be when we finally do.

- Posted using BlogPress from my iPhone

Monday, July 11, 2011

The Debt Ceiling Controversy

A lot of people are threatening the end of the world if Congress doesn't raise the debt ceiling. But there's an important question that should be asked.

By how much?

If it's so damn important, why haven't we heard anything specific about how much they want to raise it? Also, if $14 trillion isn't enough, what will be? $30 trillion? $100 trillion? For how long?

The Paul Ryan plan is by far the most aggressive budget plan that's getting any serious attention, and it's going nowhere. But even the "drastic" Ryan plan will take 30 years to balance the budget, even using ridiculous assumptions that "exclude interest." How long will it take to actually pay down the principal? What if interest rates go back up toward historical averages? What if they went up to the level they were at when I was born?

Do people really think we can keep borrowing indefinitely? Do they think we can get away with never paying it off?

Why more regulation is not the answer

Many people associate pure free-market capitalism with a complete lack of regulation. This is not the case. Regulation is the primary reason free-market capitalism works so well. But in a capitalist system, the regulations are market-based instead of based on politically motivated bureaucrats telling people what they can and can't do.

Under capitalism, people act in their own self-interest and pursue profits. That's a good thing. Profits are a signal that an entrepreneur is doing something productive by creating something worth more than the sum of its parts. If someone can produce a good or service for a cost below what people are willing to pay for it, he makes a profit, and in doing so, creates wealth, prosperity, and a higher standard of living for everyone. Some people try to create goods or services, but in doing so lose money. Those people create a whole that is worth less than the sum of its parts. The market will force them to either increase efficiency or quality. If not, they will be forced out of business or purchased by a competitor who's doing a better job of meeting the public's desires.

Bailouts, government guarantees, subsidies, and all other methods of socializing private risk undermine the regulation imposed by free-market forces. These things artificially encourage people to take risks they would have otherwise avoided. For example, if someone else is paying your bar tab, you're probably going to drink more than you otherwise would. This is an example of a phenomenon called "moral hazard." When the risk side of the risk/reward calculation is removed, you're no longer in the realm of free-market capitalism and moving closer to totalitarianism and fascism.

The bank bailouts are a good example of this. So were the bailouts of the GM and Chrysler unions. The FDIC is even a huge example of moral hazard.For example, people pay practically no attention to the financial condition or solvency of their banks. After all, why would they? They're FDIC insured! In other words, no one cares if their deposits are in a bank that is over-leveraged because if it fails, the FDIC will bail out the depositors. Without the FDIC, people might pay a little more attention to the financial condition of their banks. Banks would probably compete based on financial security, as opposed to free toasters, interest rates, and how quickly they can rubber stamp a home equity loan to finance a boat. Because Fed policy has been setting interest rates at damn near zero for way too long, the only way banks can make money involves lots of leverage. That dynamic is a huge part of our current mess.

And while getting rid of the FDIC sounds terribly drastic, it is essentially insurance paid for by the banks. There's no good reason why this couldn't be done through private insurance.

There are a lot of people who think that we just need smarter regulations implemented by smarter and incorruptible regulators. But we're just as likely to end up with Tim Geithner as Sheila Beir. We're a hell of a lot more likely to get Geithner than God. I've never understood why government regulators are expected to be any smarter or less corrupt than private ones. Who's going to regulate them?