One hundred and sixty years ago an obscure French economist, Frederic Bastiat, published an essay entitled “What is Seen and What is Not Seen.” In it he argued that government spending always has consequences – often unseen consequences. To illustrate his point, he tells a parable wherein a boy breaks a windowpane in the family house which must be repaired by a glazier. Since the glazier would otherwise have been unemployed, the broken window produces an economic benefit – the seen thing. The unseen thing is that the homeowner is no better off with the new windowpane than the old, but he is now deprived of the money spent on the repair which he could have used to replace his worn out shoes or added a book to his library.
To put the seen and unseen in a modern context, the federal government intervened as the lender of last resort to provide liquidity to the financial and auto industries in 2008, allegedly so they could meet their obligations. I say allegedly because the government has refused to release its analysis of the "systemic risks" that justified its unprecedented intervention into the financial system with taxpayer money. It won’t even define what “systemic risk” means for those empowered to intervene. Arguably, some of the interventions were unnecessary if the auto industry had been allowed to go through the bankruptcy process and banks had used their mortgage loss remedies. The “unseen” thing is the precedent set for government interference in the private sector in the future.
More troubling than the lender of last resort, however, has been the government’s recent role as the spender of last resort. The motive for government spending has always been to produce a host of “seen” projects that so bedazzle voters smitten by the politician’s Keynesian magic that they forget they are also taxpayers. The “unseen” is the future taxes that must be paid for these projects and the alternative personal consumption that would have been possible absent those future taxes.
The latest orgy of government spending – Obama’s reckless $862 billion “stimulus” – is conspicuously absent of “seen” benefits whereas the “unseen” consequences of deficits, debt, and rising taxes are embarrassingly obvious. Obama’s sales pitch that stimulus was needed to prevent unemployment from rising above 8% has been disproven, and last week Bloomberg reported, "The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust." Poll after poll shows the alarm the public is feeling that a double dip recession, if not a depression, is headed this way when it comes time to pay the bill. Democrat talk about a second stimulus is not helping matters.
Like the homeowner in Bastiat’s parable, American society is no better off after the stimulus “repair” than before it, but after paying for it, the loss of spending on personal consumption impoverishes both taxpayers and the economy.
In addition to the failed stimulus, Obama concurrently inflicted a $1.2 trillion healthcare expense on future generations. When Medicare and Medicaid were launched, government estimates of their future costs turned out to be woefully low and it would be naïve to not expect the same will happen with ObamaCare. The cost of cap and trade, assuming Obama can get it through the next Congress, will make almost everything produced in this country more expensive. Realizing the likely loss of the House and seven or more Senate seats in November, the Democrats are talking about trying to pass cap and trade and other unpopular legislation in the lame duck session.
Sometime in the next week the national debt will exceed $13 trillion and rise to $20 trillion in the next 10 years. To put that in perspective, the average debt per American is $43,000. Per taxpayer it is $120,000. At a 3% interest rate, the annual cost to service a $20 trillion debt is $6,000 per taxpayer, assuming half of the workforce pays taxes as is currently the case. That’s $12,000 per middle class working couple in addition to the taxes paid for other government services.
Congress will spend $3.5 trillion this year, which will grow to over $6 trillion by 2020 as baby boomers retire and begin to receive social benefits. Realistic economic models – not the kind Congress games the CBO with – show that a deficit of $1 trillion dollars, the shortfall between spending and tax receipts, will continue to occur every year for the next 10 years, adding to the national debt to the point that the debt service cost per taxpayer will grow beyond the capacity of the tax base to pay it. None other than Mort Zukerman, a card-carrying Democrat op-ed writer for US News & World Report, called this the most fiscally irresponsible government in US history in an article last week. And China’s largest credit rating agency, Dagong Global Credit, showed what it thought of America’s lack of fiscal discipline by lowering the US credit rating to AA from AAA recently.
A federal debt of $20 trillion (and more than $20 trillion after 2020) could very well bring about the economic collapse of the US. If the debt continues to soar, and under Obama, it will, the dollar would implode and prices for foreign goods -- which now make up 15% of our economy -- would skyrocket. Private investment would shrink, and along with it, private-sector GDP.
Thus, items we customarily purchase, i.e., shoes, clothes, cars would become too expensive to buy. The American standard of living, which is the envy of the world, would then decrease and the next generation will be saddled with insurmountable debt, not of their making. American financial woes would spill over into the global marketplace contributing to its financial decline.
If we stay on this course, the US is on a track to default its debt. In 2011, the U.S. national debt will exceed GDP for the first time in our history. At this point nations lose control over their finances because debt in excess of GDP becomes increasingly difficult to service. Rather than raise taxes, politicians succumb to the temptation to simply shift interest payments to long-term debt, setting off a vicious cycle of ever-rising interest payments. At some point, GDP no longer generates enough wealth to service the debt, and the only option is default.
A growing level of federal debt also increases the probability of a sudden fiscal crisis, during which debt holders lose confidence that the government can manage its budget, in which case the US loses its ability to borrow at affordable rates. It’s possible that interest rates would rise gradually as investors’ confidence declined, but the more likely scenario, which has played out in countries like Greece and Argentina, is that a sudden psychological tipping point is reached where the loss of confidence sharply drives up interest rates on government debt. The point at which that might happen is anyone’s guess, because the US debt-to-GDP ratio is climbing into territory it’s not seen before.
If we reach a tipping point at which debt holders essentially panic, fearing that the US might default on its debt or that it might print money deflating the economic value of outstanding debt, interest rates could jump multiple points quickly. In the recent Greek financial crisis, rates jumped two points above the German bond rate (which is considered to be a stable and reliable euro-denominated peg), then it jumped to a four-point premium, then an eight-point premium. A significant increase in interest would reduce the market value of outstanding US bonds and inflict terrible losses on their owners.
This could trigger a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail. Foreign investors, who have recently owned nearly half of U.S. debt (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses, making them decidedly less friendly in bankrolling future US debt.
Dessert anyone?
Helped by the online media and cable news, voters understand what the Democrat Congress has done to the American economy perhaps better than they have in any previous election, and will likely make them pay dearly in November. Unfortunately, the Republicans have shown that they are not much better in managing the national purse. The loss of the House and the end of Democrat supremacy in the Senate, if not its loss, will set the stage for a replay of the standoff between Congress and the White House as happened in the second half of Clinton’s first term. Obama is not the politician that Clinton is, but if the Republicans are not careful, they will become Obama’s foil, improving his chances for reelection in 2012. The Republicans in the next session of Congress would do well to remember that Newt Gingrich and the Republican landslide of 1994 overplayed its hand and made it possible for Clinton to be reelected in 1996.
Rather than raise taxes, as the Democrats are saying must be done, the sensible thing to do is to reverse the things that make tax increases necessary – i.e. repeal ObamaCare and unwind the reckless spending that the Democrats have committed this country to over the past two years. About a third of the TARP money is unspent. That should be returned to the Treasury, not converted into a piggy bank for pet projects of the White House and Congress.
Repealing the excesses of the last two years is not possible with Obama in the White House unless he is willing to cooperate with Republicans in 2011. As Michael Boskin observed in an editorial last week, that’s not unheard of. Clinton made a major move back to the political center – to his own and the nation's benefit – when Republicans won control of Congress in 1994. In partnership, they balanced the budget and reformed welfare. For Obama to get to a similar place after the midterm elections, Boskin says, he would have to partner in "repealing and replacing" his signature initiatives. Even if he believed his policies have made matters worse, I don’t believe his ego will allow him to repeal them.
De-funding his programs is possible without Obama’s cooperation, since appropriations are made in the House and the House will likely be in Republican hands after November. But Obama is shrewd enough to vilify them as obstructionists if the Republicans can’t win the hearts and minds of voters and convince them that de-funding and stopping the Obama Express is in the country’s interest.
Obama and his Democrat tag team partners in Congress have driven their approval ratings to historic lows because there was no one else to blame for the current mess. When the Republicans control the congressional agenda, there will be someone else to blame. Republicans will have two years to show they have a better direction for the country and that we can’t afford an Obama second term. Two years. Not a lot of time, but look at what the Democrats accomplished in their two years.
To put the seen and unseen in a modern context, the federal government intervened as the lender of last resort to provide liquidity to the financial and auto industries in 2008, allegedly so they could meet their obligations. I say allegedly because the government has refused to release its analysis of the "systemic risks" that justified its unprecedented intervention into the financial system with taxpayer money. It won’t even define what “systemic risk” means for those empowered to intervene. Arguably, some of the interventions were unnecessary if the auto industry had been allowed to go through the bankruptcy process and banks had used their mortgage loss remedies. The “unseen” thing is the precedent set for government interference in the private sector in the future.
More troubling than the lender of last resort, however, has been the government’s recent role as the spender of last resort. The motive for government spending has always been to produce a host of “seen” projects that so bedazzle voters smitten by the politician’s Keynesian magic that they forget they are also taxpayers. The “unseen” is the future taxes that must be paid for these projects and the alternative personal consumption that would have been possible absent those future taxes.
The latest orgy of government spending – Obama’s reckless $862 billion “stimulus” – is conspicuously absent of “seen” benefits whereas the “unseen” consequences of deficits, debt, and rising taxes are embarrassingly obvious. Obama’s sales pitch that stimulus was needed to prevent unemployment from rising above 8% has been disproven, and last week Bloomberg reported, "The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust." Poll after poll shows the alarm the public is feeling that a double dip recession, if not a depression, is headed this way when it comes time to pay the bill. Democrat talk about a second stimulus is not helping matters.
Like the homeowner in Bastiat’s parable, American society is no better off after the stimulus “repair” than before it, but after paying for it, the loss of spending on personal consumption impoverishes both taxpayers and the economy.
In addition to the failed stimulus, Obama concurrently inflicted a $1.2 trillion healthcare expense on future generations. When Medicare and Medicaid were launched, government estimates of their future costs turned out to be woefully low and it would be naïve to not expect the same will happen with ObamaCare. The cost of cap and trade, assuming Obama can get it through the next Congress, will make almost everything produced in this country more expensive. Realizing the likely loss of the House and seven or more Senate seats in November, the Democrats are talking about trying to pass cap and trade and other unpopular legislation in the lame duck session.
Sometime in the next week the national debt will exceed $13 trillion and rise to $20 trillion in the next 10 years. To put that in perspective, the average debt per American is $43,000. Per taxpayer it is $120,000. At a 3% interest rate, the annual cost to service a $20 trillion debt is $6,000 per taxpayer, assuming half of the workforce pays taxes as is currently the case. That’s $12,000 per middle class working couple in addition to the taxes paid for other government services.
Congress will spend $3.5 trillion this year, which will grow to over $6 trillion by 2020 as baby boomers retire and begin to receive social benefits. Realistic economic models – not the kind Congress games the CBO with – show that a deficit of $1 trillion dollars, the shortfall between spending and tax receipts, will continue to occur every year for the next 10 years, adding to the national debt to the point that the debt service cost per taxpayer will grow beyond the capacity of the tax base to pay it. None other than Mort Zukerman, a card-carrying Democrat op-ed writer for US News & World Report, called this the most fiscally irresponsible government in US history in an article last week. And China’s largest credit rating agency, Dagong Global Credit, showed what it thought of America’s lack of fiscal discipline by lowering the US credit rating to AA from AAA recently.
A federal debt of $20 trillion (and more than $20 trillion after 2020) could very well bring about the economic collapse of the US. If the debt continues to soar, and under Obama, it will, the dollar would implode and prices for foreign goods -- which now make up 15% of our economy -- would skyrocket. Private investment would shrink, and along with it, private-sector GDP.
Thus, items we customarily purchase, i.e., shoes, clothes, cars would become too expensive to buy. The American standard of living, which is the envy of the world, would then decrease and the next generation will be saddled with insurmountable debt, not of their making. American financial woes would spill over into the global marketplace contributing to its financial decline.
If we stay on this course, the US is on a track to default its debt. In 2011, the U.S. national debt will exceed GDP for the first time in our history. At this point nations lose control over their finances because debt in excess of GDP becomes increasingly difficult to service. Rather than raise taxes, politicians succumb to the temptation to simply shift interest payments to long-term debt, setting off a vicious cycle of ever-rising interest payments. At some point, GDP no longer generates enough wealth to service the debt, and the only option is default.
A growing level of federal debt also increases the probability of a sudden fiscal crisis, during which debt holders lose confidence that the government can manage its budget, in which case the US loses its ability to borrow at affordable rates. It’s possible that interest rates would rise gradually as investors’ confidence declined, but the more likely scenario, which has played out in countries like Greece and Argentina, is that a sudden psychological tipping point is reached where the loss of confidence sharply drives up interest rates on government debt. The point at which that might happen is anyone’s guess, because the US debt-to-GDP ratio is climbing into territory it’s not seen before.
If we reach a tipping point at which debt holders essentially panic, fearing that the US might default on its debt or that it might print money deflating the economic value of outstanding debt, interest rates could jump multiple points quickly. In the recent Greek financial crisis, rates jumped two points above the German bond rate (which is considered to be a stable and reliable euro-denominated peg), then it jumped to a four-point premium, then an eight-point premium. A significant increase in interest would reduce the market value of outstanding US bonds and inflict terrible losses on their owners.
This could trigger a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail. Foreign investors, who have recently owned nearly half of U.S. debt (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses, making them decidedly less friendly in bankrolling future US debt.
Dessert anyone?
Helped by the online media and cable news, voters understand what the Democrat Congress has done to the American economy perhaps better than they have in any previous election, and will likely make them pay dearly in November. Unfortunately, the Republicans have shown that they are not much better in managing the national purse. The loss of the House and the end of Democrat supremacy in the Senate, if not its loss, will set the stage for a replay of the standoff between Congress and the White House as happened in the second half of Clinton’s first term. Obama is not the politician that Clinton is, but if the Republicans are not careful, they will become Obama’s foil, improving his chances for reelection in 2012. The Republicans in the next session of Congress would do well to remember that Newt Gingrich and the Republican landslide of 1994 overplayed its hand and made it possible for Clinton to be reelected in 1996.
Rather than raise taxes, as the Democrats are saying must be done, the sensible thing to do is to reverse the things that make tax increases necessary – i.e. repeal ObamaCare and unwind the reckless spending that the Democrats have committed this country to over the past two years. About a third of the TARP money is unspent. That should be returned to the Treasury, not converted into a piggy bank for pet projects of the White House and Congress.
Repealing the excesses of the last two years is not possible with Obama in the White House unless he is willing to cooperate with Republicans in 2011. As Michael Boskin observed in an editorial last week, that’s not unheard of. Clinton made a major move back to the political center – to his own and the nation's benefit – when Republicans won control of Congress in 1994. In partnership, they balanced the budget and reformed welfare. For Obama to get to a similar place after the midterm elections, Boskin says, he would have to partner in "repealing and replacing" his signature initiatives. Even if he believed his policies have made matters worse, I don’t believe his ego will allow him to repeal them.
De-funding his programs is possible without Obama’s cooperation, since appropriations are made in the House and the House will likely be in Republican hands after November. But Obama is shrewd enough to vilify them as obstructionists if the Republicans can’t win the hearts and minds of voters and convince them that de-funding and stopping the Obama Express is in the country’s interest.
Obama and his Democrat tag team partners in Congress have driven their approval ratings to historic lows because there was no one else to blame for the current mess. When the Republicans control the congressional agenda, there will be someone else to blame. Republicans will have two years to show they have a better direction for the country and that we can’t afford an Obama second term. Two years. Not a lot of time, but look at what the Democrats accomplished in their two years.
No comments:
Post a Comment