Serious Implications

What’s Wrong with “Musgrave’s Law?”

Ralph has a simple and elegant solution to solving our national debt problem, which seems to make some people nervous.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A than B. Or for more deflation while buying back, apply more of B relative to A.

The original post contains several questions raising concerns about printing lots of money. For example, doesn’t printing money cause hyperinflation? Not necessarily. The U.S. has recently increased its money supply enormously without inflation. Despite the massive fiscal stimulus, money supply actually shrank over the first part of 2010.

This year we’re likely to hear from Republican supply-siders about how high the taxes are for wealthy Americans. They’ll claim that taxes will need further cutting to keep the economy growing. They like to quote high percentages of taxes paid by top earners. The facts show, however, that while percentages of total tax payments have gone up, the top 1% of wealthy Americans have enjoyed tax cuts in terms of real dollar amounts.

These tax cuts have cost the current and future U.S. taxpayers roughly $500 billion a year from 2001 to present, sending the National Debt soaring from $5.6 trillion in 2000 to over $9 trillion today. That means the government has borrowed money to pay for the Bush tax cuts. That amounts to socialism for the rich, and a real problem for the rest of us and our kids.

The graph below shows tax payments adjusted for inflation in constant 2004 dollar values. Notice that total revenues decreased substantially in 2004 compared to 2000. The share of income tax paid by the richest 1% was higher in 2004 compared to 2000 but the amount they paid was actually less than in 2000.

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Source: Center on Budget and Policy Priorities

The Bush tax cuts have, in fact, been regressive, meaning that they have led to greater after-tax income inequality. The rich get richer (and politically more powerful) and the rest of us fall behind.

There’s more about this in an excellent CBPP paper here.

Regardless of what they say, the Bush Administration and their tribe (including Mitt Romney) has and will continue to use government appropriations and tax policies to loot the U.S. Treasury and make their people wealthier. That’s their record.

The previous three blogs have spoken to the insidious and destructive influence of “easy” personal credit, usually involving credit cards, on the financial lives of ordinary Americans. What appears for many of us to be a comfortable affluence on the surface, is often bought on credit. Interest payments grow like a cancer, limiting our job options, our investments, what we put away or our kids, and prevent us from living fuller lives.

The same is apparently true for the nation. The International Institute of Management (IIM) has released its white paper U.S. Economy Risks and Strategies for 2007-2017 written by its President, Med Yones. The paper is highly readible, although it could have used some grammar edits, and a highly rational approach to the current and future U.S. economic predicament.

From its introduction:

On Jan 31st, 2007, the president of the United States gave his speech on the State of the Economy citing strong economic growth, record Dow Jones performance and low unemployment rate. This report finds a different picture than the one announced. A deeper look into the economy reveals that the painted rosy picture is based on selective facts instead of a neutral assessment of all relevant numbers and economic trends. According to the author of the white paper, It is true that the U.S. Economy grew at 3.5 percent rate in 4th quarter of 2006, but the economic real growth is much less than advertised. Since 2001, economic growth have been largely fueled by rapid increases in asset prices (housing bubble) and expanding consumer debt rather than development projects, which results in non-sustainable and unhealthy (debt-driven) growth. In order to address the emerging socioeconomic risks, policy makers must acknowledge the economy’s strengths, weaknesses, opportunities and threats. The the U.S. government must be candid in communicating with the American public and the approach must be direct.

Perhaps the saddest aspect of the economic policies of the last six years, greatly compounded by the war in Iraq, is the American commitment to paying interest on debt – largely owed to foreign entities. Again, from the IIM report:

National debt

In 2000, the U.S. government had a surplus (profit) of about $237 billion (the largest in U.S. history). In 2006 the budget deficit was about $390 billion (loss). For information on Whitehouse budget details please visit http://www.whitehouse.gov/omb/budget/fy2006/tables.html
Although 2006 budget deficit (loss) is only about 3% of GDP, the problem is the accumulation of losses over multiple years (and therefore the debt to finance the deficit). By the end of 2006 (over a period of 6 years), the accumulated national debt was about $8.3 trillion! (the largest in U.S. history). Note: The U.S. government has borrowed that money to pay for tax breaks, new Medicare drug benefits, the war in Iraq and other policies.
A large national debt is bad. Why? The government has to pay interest on the debt, as the debt and the interest payment grows, eventually all the government can do is pay the interest payment, and no money left over for other critical socioeconomic expenditures. If uncontrolled, this could leads to bankruptcy and major socioeconomic crises.
In Fiscal Year 2006, the U. S. Government spent $406 Billion of its budget on interest payments to the holders of the national debt. Compare that to Education at $61 Billion, and Department of Transportation at $56 Billion. When interest payment becomes larger than other critical socioeconomic development budgets, this calls for a major concern.

The things we need to invest in, especially our 21st Century energy infrastructure, may simply be beyond our means. The interest payments and health care costs will smother the innovations and developments we need to adapt to a post-petroleum world – that’s the danger.

The IIM paper goes on to make some rather “quaint” suggestions to make the U.S. political process more rational, such as having non-partisan academics and other experts establish a set of socioeconomic metrics that would be used as a national agenda that candidates would address in their campaigns. After elections, those in government would be objectively evaluated on the basis of improving or deteriorating metrics. The politicians would be rewarded on the basis of their performance in meeting the clearly defined criteria. There would also be much stricter oversight of potential conflicts of interest, such as giving no-bid contracts to campaign supporters.

It’s a good paper, well worth the 15 minutes or less it takes to read. The report was reprinted by New Zealand’s Scoop Independent News