It's for from the Children

How can we combine tax cuts and ballooning spending? Connie Mack, the former Republican senator from Florida, has a few thoughts:

Well, the U.S. government has to get money from somewhere. As a two-term former Republican senator from Florida, where do you suggest we get money from?

What money?

The money to run this country.

We'll borrow it.

I never understand where all this money comes from.

When the president says we need another $200 billion for Katrina repairs, does he just go and borrow it from the Saudis?

In a sense, we do. Maybe the Chinese.

Is that fair to our children? If we keep borrowing at this level, won't the Arabs or the Chinese eventually own this country?

I am not worried about that. We are a huge country producing enormous assets day in and day out. We have great strength, and we have always adjusted to difficulties that faced us, and we will continue to do so.

Comments

[Shem]

As a 21 year old who will be expected to help foot the bill for her largesse for the rest of my adult life, I'd just like to say that sometimes I hate this country.

[Shem]

Pardon me, his largesse. What the hell kind of grown man goes by the name Connie? That's even worse than Scooter, if you can believe it.

[Ron Hardin]

I owe several million dollars to myself and don't know how I'll ever pay it off.

That's the equivalent consumer worry to the national debt.

It can all be paid off with a single dollar.

[Shem]

'cept for that considerable and ever-growing chunk of the debt that's held by foreigners. And provided they want to keep pouring money into our country. I personally give it about a 65% chance that they will. Not terrible odds, but not ones I'd wager my future on either.

[Rob Halford]

I sometimes think the only statistic these "deficits don't matter" people are paying attention to is national operating deficit as a percentage of GDP, which is apparently not that high by historical and international standards. But I'm sure that's not the only stat that matters, and I'm also sure that doesn't include social security and medicare.

These were heady days, weren't they?

[TDM]

People foreign and domestic are throwing vast sums of money at our government for around 4% and people still worry about where the money will come from? And even if foreigners want their money back we will still be better off than if we had never taken their money. We have plenty of people with enough money and assets to finance our current debts, and we will leave all those assets to our children, who will be far richer than we are, just as we are far richer than our parents.

The whole bottom 50% pay only 3.5% of today's tax burden to take care of Reagan's deficits. Our bottom 50% children will probably pay less to take care of Bush's deficits. Besides, taxes both take away money we have and reduce the amount of money we will make and leave to our children. Deficits matter less than taxes.

[Sourav]

TDM,

The catch is that the loans won't be 4% if our economy is faltering, and a faltering economy won't be able to pay back a large debt because our currency will be devalued -- a 3rd world debt situation, and Bono might not be around to publicize our plight.

[tarran]

Well, the money comes from several sources.

1) Taxation
2) Borrowing from people with money
3) The printing press.

What's increasingly happening is, I believe, option 3. The Federal Govt floats a bond. The Federal Reserve buys the bond and pays with a check. The Fed Govt deposits the check in a Federal Reseve Bank.

The bank reports that its deposits have gone up. The Fed prints the money it needs so that the actual reserves match the deposits on paper, and delivers it to that bank.

In the meantime, the bank is allowed to loan out several dollars for each one it has deposited within it. So it "creates" virtual money which it then loans out.

The net effect of this vile scam is that since more money represents the same amount of wealth, the face value of the paper currency decreases. Thus your purchasing power is transferred to those receiving the freshly printed currency.

Additionally the credit pyramided onto this freshly printed money is loaned out one such easy tems, and so profligately that really bad ideas get funded, as in the .com boom. This leads to an inevitable bust as these bad investments fail because they were dumb ideas, and people don't have so much money that they are willing to waste it on them. So you get a bust, people start losing their jobs, and people demand that the government prop up the failing businesses by more spending which requires more money to be printed, starting the cycle afresh.

The whole business is unacceptable. However there is an argument that taxation is worse than inflation.

The laws supporting taxation empower government officials to snoop in our finances to demand records and to insert themselves into business transactions. Inflation does not require any of this. If the Federal Govt just printed the money it needed, we wouldn't need an IRS.

On the other hand, people recognize that they are being looted when they pay a tax. When the price of milk goes up a few cents, they don't.

If I rob a few banks and make off with $500,000 dollars, I could go to jail for the rest of my life. Alan greenspan robbed almost everyone of 30% of their savings over the last few decades, and people say he was good guy. There ain't no justice.

[thoreau]

Glad to know that the Senator is so confident that everything will work out just fine.

Here I thought that the best way to secure my financial future was to pay off my debts ASAP, build an emergency fund, and start investing. But apparently I can just borrow all I want and, oh, it will work out. I'm a resourceful guy. People are willing to lend. No problem!

[JD]

Heh -

"You must live with a keen sense of your own mortality.

I am one of these guys who think I am going to live to be 120 years old.

Great. How do you plan to spend all that time?

I'd reform the tax code."

To reform the tax code? I'd say 150, 160, maybe...the guy is nothing if not positive!

[quasibill]

"What's increasingly happening is, I believe, option 3"

Yep. Since 1985, the adjusted monetary basis has QUADRUPLED. (the St. Louis Fed has great graphs and charts on this stuff). There were a couple of periods of slightly slower increase, but since 2000 it's looked pretty much like a plane taking off.

"On the other hand, people recognize that they are being looted when they pay a tax. When the price of milk goes up a few cents, they don't."

While I can agree that our current income tax situation is far from ideal, I still think this is the worse situation - when people really do think they are getting something for nothing out of the government.

[Rich Ard]

"It depends on how you define middle class. I don't think that there would be a large percentage of middle-income families that would have a $500,000 house."

Ranks up there in surreal lines with "We were in Barstow, somewhere near the edge of the desert, when the drugs started to take hold."

(paraphrased from memory)

[Bill Woolsey]

Contrary to thoreau, government deficits aren't
more and more being financed by money creation.

During WW2, the Federal Reserve was creating money and buying government debt to help the government finance its deficit. Soon after that time, the Fed has instead bought govenment debt at a rate that has nothing to do with the amount of money the government needs to borrow, but rather with a mind to manipulate macroeconomic performance. While during the sixties and seventies it might be claimed that the macroeconomic rationale for inflationism was just a cover for government financing needs, during the late seventies through today, the financing needs have become severe and the Federal Reserve has implemented a low inflation policy.

What evidence is there that the Fed has "increasingly" used money creation to finance deficits?

It seems to me that the Fed buys goverment bonds all the time, but it does so at a rate aimed at keeping interest rates at levels that the Fed thinks will keep aggregate expenditure growing with productive capacity with only a low inflation rate.

The amount of bonds sold by the Federal government, on the other hand, has been driven by a desire to spend federal monies on various projects along with a lack of interest in raising taxes and instead an interest in lowering tax rates.

On the other hand, as fiscal problems become more severe in the future, it is always possible that inflation will be used to "solve" them. This is especially true of the national debt, but it is also possible that entitlements like Social Security and Medicare will be under-indexed for inflation and the burden inflated away rather than explicit cuts made. And, of course, the "official" national debt can always be purchased by the Fed, assuming those in power at the time are willing to accept a rapid run up in the price level.

[thoreau]

I never said anything about Fed policy. I simply implied that the Senator is short-sighted and unrealistic.

[cdunlea]

We have plenty of people with enough money and assets to finance our current debts, and we will leave all those assets to our children, who will be far richer than we are, just as we are far richer than our parents.

Umm...yeah. And they'll live blissfully, blissfully happy, forever and ever, right? Because, after all, it never works the Other Way, no nation ever goes from vast prosperity to second-rate economic status.

News flash: our parents saved money far better than we do. And when we borrow, we borrow from financial companies, like Cendant and Beneficial, owned by European and Asian conglomerates. So even if the Fed buys our debt (a small percentage of bond purchases, BTW), our personal wealth is being drained to entities outside the US.

[Russ D]

Weren't the Philadelphia Athletics the most financially inept/crooked baseball team in major league history? I mean, even worse than the Browns and the Devil Rays?

[c]

It's too bad he's so stupid because that Connie Mack sure is a handsome man.

[Adam]

Russ D - I believe the Chicago Black Sox were the most crooked baseball team in major league history. I had never heard of the Philly Athletics before reading this article on Sunday.

Quick research leads me to this, which suggests you might be right (but I don't have time to read it right now to verify): Philly's Links to Black Sox Scandal

[hmmm]

so who are the suckers here? us, or the countries that lend us the money knowing we can't pay it back because we are in the worst financial shape in history, we suck, the chinese are kicking our ass, we can't make good cars, - insert cliche here - etc? so we default on our loans and those countries never get paid. sounds ingenious to me. don't worry shem, it's the chinese children that will have to pay for their dumb countries bad loaning decisions, not you.

[poco]

We have great strength, and we have always adjusted to difficulties that faced us, and we will continue to do so.

"Americans are God's chosen people. He loves us, and us alone, for our freedoms. He says the rest of the world should do what we want, like they always have, and I know this because He told me personally."

[Captain Holly]

Wait a minute, I'm confused. Back in the late 80's and early 90's we were supposed to be a wholly-owned subsidiary of Japan and Germany by now? What happened?

Oh, their economies stagnated during the past decade under the weight of centralized government bureaucracies and massive social spending? My bad.

[thoreau]

Oh, their economies stagnated during the past decade under the weight of centralized government bureaucracies and massive social spending?

And nothing like that could ever happen here.

[Isaac Bartram]

Oh, their economies stagnated during the past decade under the weight of centralized government bureaucracies and massive social spending?

In the case of Germany that is true. Japan is more complicated.

Japan still has lower social spending than the US, however it's burden of bad private debt, subsidized exports and a real estate bubble of absurd proportions made for its downfall.

I still recall overhearing earnest conversations about Japan's mastery in about 1993, when it was becoming obvious that their real estate bubble had already burst and the weaknesses in their banking system were coming to light.

IMO the real estate bubble and our level of private debt is much more of a hazard than the the level of public debt at this point.

Although I think it is possible that it is the example of our public debt that is to some extent encouraging our levels of private debt. We ignore it at our peril.

As to Connie Mack, he was in fact a pretty decent senator. He voted in the right side of a lot of personal freedom issues. It's too bad he's swallowed the "deficits don't matter" line so thoroughly.

[theOneState]

Holy crap that's a frightening interview.

[OPUS]

We are so screwed!

[Dave W.]

I think Mack is saying what everybody secretly hopes and forces herself to think outside of libertarian circles. IMO, ppl are getting more screwed by generational divides than by gender or race or religious or disability or any of the other divides in contemporary US society.

[Stretch]

Weren't the Philadelphia Athletics the most financially inept/crooked baseball team in major league history? I mean, even worse than the Browns and the Devil Rays?

Regardless of corruption, I still maintain that Philly lost the wrong team. Combined the Philly/Oakland Athletics have won 9 championships to the Phillies 1. The A's have as many rings as the Phillies have total playoff appearances. And don't forget that the Phillies are the oldest team in the league at 122 years.

[Jason Ligon]

Dave W:

Agree 100%. The AARP will be the most significant democratic force in history, if it isn't already.

This means:

1) We will have nationalized healthcare that trades innovation for cheap to free access for current users. This screws the kids, of course.

2) We will have bailouts of bankrupt pensions and the kids will pay the difference.

3) We will have an old age welfare program that ensures 'retirement in dignity' where 'dignity' means coastal property and maid service.

Blech.

[R C Dean]

Oh, their economies stagnated during the past decade under the weight of centralized government bureaucracies and massive social spending?

And nothing like that could ever happen here.

Or in Red China.

Concur 100%, Jason and Dave. Current old-age benefits in this country are a massive wealth transfer to, not from, but TO, the wealthiest cohort on the planet.

[thoreau]

Very, very good point, R C.

[Isaac Bartram]

Or in Red China.

I believe that China's policy of subsidizing exports via currency manipulation is similar to Japan's former practice. Add to that a bloated corrupt banking system, and yes, I suspect that China may turn out to no be the powerhouse being predicted right now. That said, with reforms (like Japan) it will certainly be a performer (like Japan).

...which is more important to stop, a few billion in Congressionally sponsored thefts of the treasury or a few trillion dollars in future obligations that are going to be politically impossible to get out of?

Again it comes to most serious crisis. The intergenerational transfer of wealth. It must be dealt with, and sooner is better than later.

[mac]

Bolton has some serious competition for the title of "the stupidest fucking guy on the planet."

Connie Mack: real life Manchurian Candidate!

[ajay]

The entitledments are going to send the U.S. the way of Europe if something is not done about it.

Healthier, happier citizens, secular government, peace abroad and the largest economy on the planet? The horror!

[quasibill]

"I believe that China's policy of subsidizing exports via currency manipulation is similar to Japan's former practice. Add to that a bloated corrupt banking system, and yes, I suspect that China may turn out to no be the powerhouse being predicted right now. That said, with reforms (like Japan) it will certainly be a performer (like Japan)."

Agreed. Although most here who refer to "Red China" have seriously mistaken ideas of what China's economy is like. In fact, if you compare our healthcare system with theirs, the Chinese are much closer to a free-market model than we are. Ditto for police SWAT teams, drug warriors, foreign military bases, etc.

So while we're busy patting ourselves on the back for being more free-market than "Red China" and spending our children's money, the Chinese are quietly saving capital and starting to build a modern economy without some of the structural defects we have. Yes, they have their own problems, as noted banking being huge, but if I were a betting man and asked to place a bet on which country would have a better standard of living in 50 years? The smart money would flow to China.

Things can and do change, but there is a tremendous amount of eye covering going on when people talk about "Red China"...

[Dave W.]

Jason,
I often enjoy your posts even though I seldom agree with them. It is nice to be on your team for once.

[Captain Holly]

Yes, they have their own problems, as noted banking being huge, but if I were a betting man and asked to place a bet on which country would have a better standard of living in 50 years? The smart money would flow to China.

I'll make a bold prediction: China will no more "bury" us than the Soviets or Japanese or Germans did. The Chinese economy is a massive internal contradiction, a capitalist economy run by a communist dictatorship.

You simply cannot have sustained economic growth without economic freedom, and you cannot have true economic freedom without real political freedom. While the Chinese have indeed worked economic miracles (much as the Soviets did in the 1950's), they still must face the inevitable day of political reckoning. In my opinion, that day will come sooner rather than later.

China will either become a liberal democracy, in which case they will indeed be a formidable economic rival, or it will regress even deeper into totalitarianism, which in turn will effectively kill the capitalist goose.

[M1EK]

"Bush offered a sensible plan to do something about the Social Security ponzi scheme"

Really? Looks to me like he offered a scheme to fuck current and future retirees while continuing to fuck current low-wage employees through the payroll tax while continuing to reward people who 'make' most of their money via investments.

[Russ D]

Stretch,

And don't forget that the Phillies are the oldest team in the league at 122 years

The oldest franchise in baseball is the Chicago National League Ball Club. There was no major league team in Philadelphia in 1877. The Braves franchise is as old as the Cubs franchise, but they've moved a couple times.

http://www.baseball-reference.com/leagues/NL_1877.shtml

As far as corruption, I was talking about ownerships, not players. (And the "black" sox players were acquitted anyway.) Since we're talking about baseball ownerships the corruption is a given, I was just talking about the degree favoring Mack's A's.

[quasibill]

"I'll make a bold prediction: China will no more "bury" us than the Soviets or Japanese or Germans did."

Agreed. The world economy is way too interrelated now. If the U.S. tanks, the world will go with it for the ride until some other market establishes itself as the free-est. But if the U.S. merely slips and enters a slow decline, and China continues to trend upward, can they eclipse us? Most certainly.

"You simply cannot have sustained economic growth without economic freedom, and you cannot have true economic freedom without real political freedom."

Maybe, maybe not. One can imagine a regime where there is essentially no political freedom, but an enlightened dictator on the throne, who knows he will make more money by having a moderate to low tax rate but allowing the economy to run freely - he just keeps the money for himself and provides chiefly a stable currency and minimal judicial services. In fact, Hoppe has made just such a compelling case in his book about democracy.

Now, that's not China. But I think it's a mistake to think that people who are given a large amount of economic freedom will focus on their lack of political freedom. It is very dependent on the extent that they perceive that their state is acting in an arbitray manner. Many in the west would see such a dictator as not doing his part in the "social bargain," but the Chinese, it appears, are much less likely to feel entitled to social programs like universal healthcare. So who knows if they'll revolt as long as they have a high standard of living?

[John]

Really? Looks to me like he offered a scheme to fuck current and future retirees while continuing to fuck current low-wage employees through the payroll tax while continuing to reward people who 'make' most of their money via investments.

Yes M1EK, his plan would have oppressed the masses. Some day when you are in charge, I am sure I can be "re-educated" in some gulag somewhere about the evils of the plan. In the mean time, I will take capitalism and a plan that allows people to own more equity rather than be dependent on the government and people like yourself.

[Pro Libertate]

Hey, Russ, don't lump the Devil Rays in with teams that have centuries of losing tradition behind them. The poor team hasn't even been around a decade, yet.

I think their fatal flaw (other than spending on a team what the Yankees spend on a player) is that they didn't take a cool Tampa-related name like Rough Riders instead of the boring name, Devil Rays. I mean, if I could sit in the stands and say, "Bully" every time something good happened for the Rays, I'm sure we'd win more often 🙂

[M1EK]

"Yes M1EK, his plan would have oppressed the masses. Some day when you are in charge, I am sure I can be "re-educated" in some gulag somewhere about the evils of the plan.

In the mean time, I will take capitalism and a plan that allows people to own more equity rather than be dependent on the government and people like yourself."

Thanks, Rush.

[saw-whet]

Come on guys, I have I-Bonds earning >7%. Knock it off with the negative stuff. 🙂

[Jason Ligon]

""You simply cannot have sustained economic growth without economic freedom, and you cannot have true economic freedom without real political freedom.""

Singapore.

[natebrau]

Chile. South Korea. Taiwan.

One of Milton Friedman's big ideas is that "a free market is a necessary but insufficient condition for a democracy to exist." The tipping point from free market to democracy: that's a curious thought.

-Natebrau

[Stretch]

The oldest franchise in baseball is the Chicago National League Ball Club. There was no major league team in Philadelphia in 1877. The Braves franchise is as old as the Cubs franchise, but they've moved a couple times.

Russ, to clarify, I meant that the Phillies are the oldest continuous, single name/city franchise in baseball, NOT that they were the first baseball team. The Chicago National League Ball Club was not named the Cubs until 1907.

Regardless, it doesn't change the fact that the Phillies have the most losses of any franchise, in any sport, ever.

[Not David]

Stretch, actually the Phillies briefly renamed themselves the Blue Jays in the late 1940s. It only lasted a couple of years, none of the fans actually called them the new name, everybody kept calling them the Phillies, so they changed it back. So whether that counts as a name change is a topic for panel discussion.

But at least they didn't call themselves the Red Legs out of anti-Commie hysteria.

[Maurice]

I'm looking out for some more information on this.