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  • “THE DANGER OF BALANCING THE BUDGET”

    Posted by Jonathan on August 19th, 2013 (All posts by )

    Henry Meers:

    House Republicans have to learn and proclaim the basics of money and taxes because balancing the budget could be a disaster for the economy as even more money is pulled out of the productive economy to pay for their past sins. The best example of how to get out of debt remains what England did after Waterloo and the massive debt of the Napoleonic War. Parliament dumped the income tax immediately, returned to sound money in 1821 and went to free trade later. The economy exploded and led to a century of prosperity like none seen before. They didn’t pay off their wartime debts, a huge sum for the time, they froze it and paid interest. As time went by, that once inconceivable mountain of debt shrank to insignificance in the shadow of the world’s most powerful economy.

    He gets it. Economic growth is the solution to most of our problems. Growth requires investment capital. The less investment capital that gets diverted from the private sector into unproductive govt spending and misguided debt paydowns, the more growth there will be.

    Read the whole thing.

    (Via Lex.)

     

    20 Responses to ““THE DANGER OF BALANCING THE BUDGET””

    1. PenGun Says:

      There are limits to everything. We are approaching many of them and “kicking the can down the road” the most popular government solution to any problem short of war is not going to work like it used to. This is why the US and many others who are very near the end of many roads are doomed if they do not make fundamental changes. As they will not … well doomed works for me.

      Can’t happen soon enough.

    2. David Foster Says:

      “The best example of how to get out of debt remains what England did after Waterloo and the massive debt of the Napoleonic War”

      But was England CONTINUING to grow the debt at Napoleonic-war levels? I don’t think so. Yet when he objects to a balanced budget, he is implying that we *should* continue to grow our debt.

      As he notes, debt financing is not always bad…if the Hoover Dam was paid for with debt, it was probably a pretty good deal. Ditto for the Interstate HIghway Systems. But much of today’s deficit spending is NOT for the acquisition of assets that have true long-term value, even though it is often sold that way. If you spend billions on programs for “Education,” which turn out to have absolutely no value and maybe even negative value, then you are doing something similar to a company which decides to Capitalize its marketing programs, rather than expensing them, on the theory they will have long-term payoff…which may just be whistling in the wind.

      It is fundamentally true that we need to grow our way out of the problem, but this is largely a matter of eliminating counterproductive regulations and tax policies and certain toxic social attitudes.

    3. Robert Schwartz Says:

      When the US had a debt of less than 60% of GDP and a deficit of 2.3% of GDP and a growth rate of 3.1% of GDP, it was reasonable to hope that we could out grow the deficit.

      Since the Panic of 2008, the deficit has not been less than 7% of GDP, the debt is passing 100% of GDP and growth rates have been about 2%, far less than their long term trend, let alone typical post recession growth rates which make up for lost time and push the economy back towards the long term trend line. Further, the Fed has been able to keep interest rates very low which allows Treasury to finance the debt with short term borrowings at extraordinarily low rates.

      We will not go into the excessively large portion of GDP now taken up by governmental spending or the soggy tax collections. Nor will we point out that a return of interest rates to long term norms would add several points of GDP to the deficit.

      My conclusion is that there is no way that we can hope that growth will get ahead of the deficit or decrease the debt relative to GDP.

      The most likely scenario is that debt will continue to grow faster than the GDP and that rising interest rates will push over the cliff into a hyper-inflationary blow off or a default and write off. Any way you look at it it won’t be pretty.

    4. S O Says:

      “(…)have to learn and proclaim the basics of money and taxes because balancing the budget could be a disaster for the economy as even more money is pulled out of the productive economy to pay for their past sins(…)”

      That’s nonsense.

      To balance the budget by spending less doesn’t do this.
      To balance the budget by raising more revenue doesn’t do this either because the money of the revenues would be moved from private to public anyway – after all, it is being spent. The difference is mostly whether the people still have a claim to get the money back (bonds) or not (taxes).
      ———-
      “A lot of what government does is consumed over many years, warships and buildings come quickly to mind, and should be paid for that way just like someone’s mortgage.”

      That’s nonsense as well. The costs are substantially higher if stuff is being paid for with credit. To add new debt (credit not for paying down old debts) is merely justified if some expense either yields higher revenue interest than debt interest or if it really needs to be had sooner rather than later.
      The former case may be true in regard to public investment in infrastructure (bridges etc).
      ———-
      “Our Republican leadership should be campaigning on a large tax cut — significantly lower income-tax rates on people and their employers– to restore the economy’s growth.”

      More nonsense. The federal income tax rates in the United States are low compared to historical tax rates. There were three decades of tax reductions. The tax-crunching policies of the GWB era yielded very disappointing GDP and job growth numbers; worse than during Clinton and largely fuelled by workforce and population growth.

      To lower taxes is not a path to high rates of growth. There are plenty vested interests which drive the lobbying and propaganda effort for lower taxes (not on the middle class, of course), and they’re the only reason for why so many people believe in lower taxes = more growth. Fact is, economic research cannot really confirm this myth.
      Look at the income tax rates of the 50′s and 60′s…
      ———-
      “This is never as easy as cutting military spending, but that has already taken too much of the needed spending reduction.”

      Obviously clueless. The Pentagon is still bloated. Even the military spending outside the Pentagon’s budget (Dept of energy et cetera) is higher than the military spending of almost every small power.
      ———-

      Mr. Meers has probably mastered how to sound like a serious, competent person, but he clearly doesn’t know much about fiscal policy.

      He’s right that the still existing overemphasis on the budget balance is dangerous. He’s also correct when he writes that high economic growth is a way out of many troubles.

      The problem is that he’s clueless about the “from A to B”, as are so many politicians. The diagnosis of the current situation is about usable, the idea of where one wants to arrive is acceptable and the idea of how to get there is useless ideology and confusion.

      It’s a widespread problem.

    5. dearieme Says:

      “The most likely scenario is that debt will continue to grow faster than the GDP and that rising interest rates will push over the cliff into a hyper-inflationary blow off …”: could be;
      “… or a default and write off”; could be. Does that exhaust the possibilities? Are there any other sorts of apocalypses available? Unfortunately, I ask in all seriousness.

    6. Grurray Says:

      “Look at the income tax rates of the 50′s and 60′s”

      http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_top_rates

      No one paid the top tax rates of 85% – 90% because of loopholes and shelters, but they were still around 50% – 60%

      http://www.aei-ideas.org/2012/04/why-we-cant-go-back-to-sky-high-1950s-tax-rates/041812wsj/

      Revenues were consistently suppressed and we had three recessions between ’53 and ’61.
      ’57 – ’58 was particularly bad with a bout of stagflation due to bad monetary policy.

      The one thing that saved us from all the punitive taxation is we enjoyed a post war near monopoly on industrial production.

      We’ll have no such luxury this time around.

    7. Robert Schwartz Says:

      Dearieme: “Does that exhaust the possibilities? Are there any other sorts of apocalypses available?”

      All good social revolutions begin with the bankruptcy of the regime. So we could have the French Revolution with a reign of terror, or the Russian Revolution with famines and gulags.

      Indeed, all of the horribles of the last 225 years would be available to us. When the state goes bankrupt, the rule of law ends, and Hobbes is in charge. Then, life would be nasty, brutish, and short.

    8. Michael Kennedy Says:

      ” Fact is, economic research cannot really confirm this myth.
      Look at the income tax rates of the 50′s and 60′s…”

      You and Obama seem determined to ignore the effect of reduced capital gains rates in the 80s.

      I agree that tax cuts alone will not solve the problem, which is probably beyond solution now anyway, but control of spending and tax cuts which reduce the federal footprint, not the high tax austerity of Europe, can get us back to 4% growth. Unfortunately, by the time reality raises its ugly head, that will not be enough.

      The reason for the Reagan deficits was the Democrat Congress he had. There is much less excuse for the GOP Congress of the late 90s and early 00s which spent like Democrats. The boom which Clinton took credit for was due to the 1994 GOP Congress. It quickly lost focus, for which I blame Gingrich.

    9. Jason in LA Says:

      Even Democrat Bill Clinton recognized the wisdom of cutting the capital gains tax. That both the left and right want to forget this uncomfortable fact would be funny, if it wasn’t so sad.

    10. ErisGuy Says:

      “The federal income tax rates in the United States are low compared to historical tax rates. “

      Nonsense. The federal income tax rate prior to 1913 was ZERO (we can argue about exceptions; e.g. Revenue Act of 1861 ). That’s 124 years of ZERO rate. No other rate appears as often as the first bracket or top bracket, making ZERO both the mode and median. Rates are unconscionably high, and we should return to the tax being unconstitutional.

    11. ErisGuy Says:

      Money isn’t matter, and dollars aren’t electrons. While there may be laws of economics similar to the laws of physics, how much confidence can we have that we know what they are? From the various conflicting predictions of economists, I’d conclude that astrology is more likely correct than economics.

      I have heard for forty years now the dire predictions of the consequences of borrowing unlimited amounts, of spending without limit, and of crushing amounts of taxation. Each year the precipice is reached, and each year it recedes into the future.

      Perhaps Socialism/Nazism/Obamunism is correct: the government can intelligently borrow and print trillions without bad effect.

    12. Michael Kennedy Says:

      ErisGuy, I think the answer to your question is that things that can’t continue, won’t. Adam Smith explained, “There is a lot of ruin in a great nation.” We have a large, but declining, class of people who contribute to the economy and who have resisted the efforts of the parasite class to discourage them. The parasite class, and I do not use that term to refer to the poor but to the nonproductive segment of the population, is growing. A few examples include the “diversity industry,” much of the education industry and a large share of government bureaucracies.

      For a few years, I was involved in local government. This was in a small suburban city in Orange County CA, The city council was well meaning and not at all corrupt in the usual sense but they used a dishonest proposal for a local bond issue to build a huge and luxurious city hall that cost about twice the proposal on the ballot measure. They filled it with 150 city employees, 100 of which earned more than $100 thousand a year. They built monuments to themselves and, when the reform group I was associated with managed to oust the majority and elect a new group, most of the new group soon adopted similar behavior.

      There is a behavior characteristic of people who want to be government officials, elected or not, who seek and find more and more that they believe government should do. I was encouraged to run for the city council and probably could have been elected but I don’t have an interest in that sort of life. Others do and they are in charge.

    13. Grurray Says:

      Things are different now than in the past because of the shadow banking system.

      Maybe you don’t believe in econophysics, but in this case how about an analogy with a biological system?

      Liquidity is blood and the banking system is the arteries. The shadow banking system is cholesterol.

      Low interest rates are statins.

      How many of us know someone who had heart problems or blockage and instead of adjusting their lifestyle by eating better and exercising just went on medication? We’re at 95% blockage right now.

      That’s the economy right now. Maybe the medicine will make up for the bad choices, but if interest rates go up then the medicine will decrease.

      Not only do interest rates have to remain low indefinitely, but there’s some concern that the medicine is losing its effect. That could be the case now with low growth levels.

    14. Michael Kennedy Says:

      Grurray, I think your analogy is a bit labored but shadow banking is a problem. What I see growing more is the “peer-to-peer banking” system. This has zero leverage and may start to provide the capital needed by small business outside the regulated, and heavily weighted to big banks, market.

      Here is one example. These organizations evaluate loan applications and then offer shares in these loans to investors. There is no fractional reserve because the loan is funded by other private parties.

      This trend seems to me to be analogous to the cash medical practices that are forming. Both trends show an attempt to avoid regulatory government and its pernicious influence on the private economy. In a way, this resembles the grey market that exists in totalitarian states.

    15. Grurray Says:

      Michael,
      I agree that the more that can be done off the grid and outside of the diseased system the better.
      Something else I’d like to see more of is local currencies.

    16. TMLutas Says:

      Strange to say regarding this subject but the most practical politician on the scene is actually not on the scene these days.

      That would be George W Bush and his 4% growth project.

    17. ErisGuy Says:

      Michael Kennedy, it isn’t as if I disagree. I am aware of Germany between the wars and the catastrophic effects of poor fiscal behavior.

      But if I complain that Millerites’ theology is wrong because the prophecies don’t come true, and global warming fantasies (cloaked as science) are wrong because the prophecies don’t come true, and…, well you get the idea; I must entertain that the opposition to Obamunist economics is wrong because the prophecies don’t come true. And they haven’t.

      The theories of economic ruination which predicted FDR’s ruin, LBJ’s ruin, etc. are older than global warming hooey.

      I know what I believe. I know where I’m placing my money.

    18. Death 6 Says:

      ErisGuy

      One word for you: Detroit

      While the process of decline may take longer where the progressive influence is not continuous or pervasive, the end result will still be the same. Those who oppose Obamanomics or its earlier mutations are seeing all the signs headed in the predicted direction. Growth, unemployment, real wages, saving, investment, market distortions, national credit worthiness….

      Perhaps the gray market or underground economy can forestall the trajectory we are on, but government will move to gain control there quickly. Most of these alternative developments seem to have high technical, transactions and information costs for more than limited application. Legal enforcement is a major concern as soon as the stakes get large.

      If the Fed cannot shrink the monetary base before the dollar loses its role as the international reserve currency, hyperinflation will likely render your money worthless no matter where you place it or make real the assets you buy illiquid.

      Mike

    19. Bill Brandt Says:

      When Reagan cut the income tax (to get out of the Carter malaise) revenues exploded. Unfortunately Congress took this windfall and spent it. A lot of things could be done that would cause the economy to explode in growth, but unless we reign in Congress it is all for naught.

      And Congress is loath to do this because spending = votes.

      I believe, like Robert Schwartz, that it will take a cataclysmic event, a financial Armageddon, before we can change things.

    20. Michael Kennedy Says:

      “The theories of economic ruination which predicted FDR’s ruin, LBJ’s ruin, etc. are older than global warming hooey.”

      And they were correct. Buy a $20 gold coin today and what will you pay ? If the Germans and the Japanese had not cooperated, we would still be in a Depression. The WWII was not a Keynes event. It took 14 million men out of the work force and wages exploded. We would not have a similar reaction because in 1940 we had all the gold that Argentina didn’t have. I hope you noticed what happened to Argentina when it didn’t go to war but got the statist economy. That’s our future in the most likely scenario. It’s nice to be 75 and look at this dispassionately. I lived most of my life during a period when we had a pretty free country.