Sunday, September 29, 2013

Borrowing Your Way Out of Debt - Part 2

Last time I talked about the reasons Democrats think you can borrow your way out of debt... this belief being a huge contributor to our national deficit.

The post begs a couple of questions: first, is it right or is it wrong? Can you borrow your way out of debt? And, of course, if not, how do we fix it?

Does it work?

First things first... can the Government borrow its way out of debt? That is, is the current strategy working?  Not only no, but hell no.  Remember that the government and the People (including most businesses) view the money in two completely different ways.
  1. The Government is looking at economics and monetary policy, and they've concocted a scheme that completely relies on the assumption that people will act as the government's model predicts they will, to the best interest of the economy at large. 
  2. The vast bulk of  the People are looking at accounting. It's a very classic view. They consider work and reward, supply and demand, their need to provide for their future; and above all, balancing their budget... or at least managing their debt. They actually act in accordance with their own self-interest.
The People largely act as they should. When recovering from tough times, they sock away some money for emergencies, they work on paying off their creditors, and they put off buying luxuries until they're sure they're financially secure. They save and wait.  Meanwhile the government assumes that if they hand the People money, they'll just run off and buy stuff, and this will jump-start the economy. Factories will be humming because the Government handed out "free money". Then, through taxes, the Government will collect back all the money it used as stimulus. They assume you'll spend freely. You can see the disparity.

That's an oversimplification, but I think it's pretty damned close. The Government's model doesn't work because they make it very difficult for a person to spend freely, which is frankly essential to their plan. They've been consistently inconsistent on the message of whether or not they'll raise taxes, while making it clear that their desire is to raise taxes. So you're not going to spend the money that you fear you're going to have to pay in taxes. They've said they'd lower the cost of healthcare for most people, yet most of the people who actually buy healthcare see their costs skyrocket.  The people for whom quoted healthcare premiums are actually cheaper are those who didn't buy the healthcare at all before. (There are a lot of really good reasons for that that are off-topic here. Maybe later.). So their "cheaper healthcare" involves them going from an expenditure of zero to an expenditure of whatever the mandated rate is... which is not cheaper than zero. Obviously, they're not going to recklessly spend the money that they're going to have to spend on either increased healthcare premiums or the fines they'd pay in lieu of those increased premiums. Businesses aren't going to hire more people when it costs more per person to stay in business. And they're not going to make investments when their "investment loopholes" are being closed. And please consider that "loopholes" start out as "incentives"... the only difference is that a loophole is an incentive that the government no longer wants to give you. The semantics are purely political tools, and whether they're good or bad depends entirely on the audience to whom the campaign speech is being directed.  Given the waffling and the insecurities, it's completely reasonable for businesses and private citizens alike to take a "wait and see" approach and not play the economists' game.

The Government's plan depends on people to act against their self-interest. So no, it won't work. It's why the Government keeps pumping money into the system and all those rosy projections don't materialize. It's why Alan Greenspan is puzzled.

How Can We Fix It?

I don't think anybody really knows, because "fixing it" requires cooperation, and there's precious little of that in this, the Most Polarized Congress Ever. And cooperation requires agreement, which isn't going to come from political ideology, and may not come from academia, either. There's so much disagreement among so many experienced, high-level economists that that's pretty clear. Still, I'm sure someone reading this will disagree vociferously, point to their favorite talking head, and proclaim that "the only" people who disagree with their pet view are somehow brain damaged. If you're that person, buzz off. Whoever you are, people disagree with you, and they're not stupid. Get over it.

But I do know what it would take for me to feel better about the economy and get things moving again. I do know what would work for me.
  1. Get rid of the guys in power. Really. They've been sending mixed signals for so long that almost nobody really believes a thing they say. There is literally nothing they can say to ease the Public's concerns about the economy so long as we have people who pass bills to see what's in them; or promise smaller government and vote for expansion, or promise savings and deliver bills. They're proven liars, and frankly their assurances sound just like their lies. To restore credibility, we need new voices.
  2. Turn off Qualitative Easing. Injecting billions into the economy per month is not helping. All it does is increase the debt. So stop making the problem worse.
  3. Repeal Obamacare. Look, sometimes you can just point at something and see the problems it causes. This is one of those times. The ACA demonstrably costs jobs. The ACA demonstrably raises costs. The ACA demonstrably hinders investment. This is why conservatives actually want people to link to the Kaiser Foundation's subsidy calculator. The biggest problem in healthcare has never been "insurance"... it's been costs, and the ability to pay. THAT's what should have been addressed in healthcare reform. You don't need insurance for a doctor's visit if those costs are reasonable and affordable. You just pay the doctor, leaving insurance for those times when you actually need insurance: catastrophic care. But the ACA removes that most affordable option, and there are other ways to address the most pressing problems. The ACA's a bad solution, not the only one, and taking people's money with mandated higher premiums and penalties doesn't leave them them any purchasing power to grow the economy at large. Remember, the money you're taking from them isn't recovered stimulus money, as they don't have that. This is the biggest single dam we've got right now, so lose it. We need people who can pay their bills, more than we need confiscation so the government can pay your bills for you.
  4. Get Government out of the way.  We already have enough stimulus. We don't need any more. The only incentive we need is stability... the reduction of risk... the knowledge that the Government isn't going to be changing the rules on us every ten minutes, finding new and creative ways to dig deeper and deeper into our pockets, requiring us to set aside money for unforeseen government-spawned expenses. It's astonishing that the politicians who laugh at and make fun of "trickle down economics" have devised a system that disproportionately benefits the "obscenely rich", then refuse to allow those benefits to trickle down, as is required by their "solution". But now they're committed to it. So let there be an environment where entrepreneurs can thrive, where they can GET some of that money from the capitalists who would back them and then PAY it to the employees they can hire; who will, after having attended to their security, BUY products and thus circulate that money back to the source pay back that debt. You don't have to raise taxes because the more often money changes hands, the more often it gets taxed anyway. For everybody who spends that dollar, there's someone who reports it as income. It's not the size of the tax rate, it's how quickly the money flows that counts. So get the hell out of the way.
Let's look at that last bit once more. The Government not only doesn't have to raise taxes to increase tax revenue, but cutting taxes will do the trick. That's because when I keep more of my money, I have more money to spend. It gets taxed when I receive it as income, then it gets taxed again when I spend it and someone ELSE receives it as income, and the sale gets taxed as well. 

This is only problematic is when the Government increases spending at the same time. Remember, the scheme is that the tax revenues will be used to pay down the debt they took on as "stimulus". When the politicians spend it again instead (as they all-too-often do), then they screw up their own plan.

You may have different thoughts. But those are mine.

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