You know the story: the Democrats won’t cut spending
and the Republicans won’t raise taxes. We’re
stuck in neutral and drowning in debt. What to do?
Our nation is divided, polarized, paralyzed. There is no
middle ground because there cannot be any middle ground.
Except for the ignorant, one cannot be neutral. With
knowledge, one can only be either a Keynesian or an anti-
Keynesian. Half-measures yield ambiguous results that
please nobody.
President Obama has been criticized on the Left for not
demanding a larger stimulus while it was as large as
Republican Senator Olympia Snowe would allow it to be. He
was also criticized on the Right for accepting a stimulus
too large while it was not large enough to end
unemployment. The critics on the Left were expecting too
much. Those on the Right believe that any stimulus other
than tax cuts (which were 40% of the stimulus) would be
too much.
Strangely enough, the politicians and journalists on the
Right complain that Obama should have concentrated on
jobs, jobs, jobs. But they only recommend balancing the
budget and deregulation. Their proposed remedy is to do
exactly what Hoover did to create the Great Depression!
These critics are intelligent and well-educated. Why don't
they recommend stimulus? They know that Jane's $1,000
check multiplied by four billion would stimulate enough
private spending to restore prosperity. But these
politicians and journalilsts can't admit that knowledge
because that would put them on a slippery slope. If they
support a stimulus that succeeds, they will be logically
impelled to support a permanent federal program of full
employment — “Socialism!”
Why do they oppose “Big Government” to the
extent of opposing recovery? Their opposition to federal
power, whether EPA, FDA, SEC, or practically anything
except DOD, CIA, and FBI is in their DNA. It is based upon
the distrust that gave us the Constitution's separation of
powers, the struggle between Jefferson and Hamilton, and
the arguments over "States' rights" that were central to
the Civil War and the battle over segregation and civil
rights. We are a multi-cultural democracy that can unite
only when threatened from outside our borders.
If we were really lucky, aliens from outer space would
invade the earth and threaten our survival. Then we would
unite as one for the common good. If the war went on for
four years with corporations loaded with "cost + 10%"
contracts and with everybody working double shifts or in
uniform, victory would end with cheers and prosperity.
Then we could put everybody to work for decades rebuilding
civilization to its former glory. But no such luck!
We survived and many of us thrived with the consequences
of that distrust when European powers were at each other's
throats and the rest of the world consisted of backward
colonies or weak agricultural societies. But now that
Europe is getting its act together and the emerging
nations are fierce competitors, we can no longer afford to
have irrational infrastructure such as 50 different
education systems and an industry shackled with health
care costs that their foreign competitors don't face.
Small government can make only small plans. Without
great plans, we will not accomplish great deeds and will
not remain the greatest nation. Only the federal
government can repair, rebuild, and renew our
infrastructure now, whatever we have to spend.
The Real Problem
Debt is not the problem. Absolutely none of the debt
incurred during the Great Depression and WW II
(equivalent to over twice our current ND) was ever
reduced. As our history proves, a strong economy simply
outgrows its debt. We’re OK when our economy is growing.
A nation never repays its debt. We finance our debt on
the bond market. We buy or sell our bonds depending upon
our budget surplus or deficit. The bond price stays high
and the interest rate stays low when the market approves
the management of our economy. We’re OK when we elect
competent managers.
As we have shown, a consistently balanced budget is
mathematically incompatible with the Fed's targeted 2%
inflation: it would result in a stalled economy, without
money to spend: deflation, which is worse than the plague.
That is why an annual budget surplus is now an historical
freak. In the past 35 years, it happened only once without
including FICA revenue. With rare exceptions, the ND has
never stopped growing from the time before the
Constitution was signed until today. But some Republicans
seeking the President's office are demanding a
constitutional amendment requiring a balanced budget. And
a majority of voters agree!
There's the rub: the fundamental and incurable flaw of
democracy, so well understood by Jefferson et al, is that
50% of the voters have below-average intelligence. (The
British philosopher, John Stuart Mill, observed that,
"Conservatives are not necessarily stupid,
but most stupid people are conservatives."
And worse yet, much of the upper half of the IQ spectrum
is poorly educated and uniformly uninformed. If the
reader doubts the validity of this argument, consider the
War on Drugs. Voters paid over $1T and destroyed a million
lives during many decades to address a problem nowhere
near as catastrophic as perfectly legal alcohol and
tobacco addiction. Now, with 5% of the world’s population,
our prisons hold 25% of the world’s convicts at enormous cost.
Or consider the "birthers", almost 50% of the adult
population who believe it is possible that a pennyless,
Hawaiian teenager in late pregnancy somehow got into an
airliner, flew half-way around the world to have her first
baby in Kenya, far from her mother, and then flew back
(without passport problems for the new-born infant)in
time to announce the child's birth in a Honolulu newspaper
so that he would be a US citizen. And that the state of
Hawaii helped her hide the facts with false documents!
Bribery
"The American Republic will endure until
the day Congressdiscovers that it can
bribe the public with the public's money."
Alex de Toqueville
Result of voter imbecility: These people will never
vote for an investment in infrastructure. Too many voters
will take the demagogue's bribe: taxes reduced enough for
beer and cigarette money for the vast majority while the
rich walk off with trillions that they can then invest in
jobs and infrastructure for China and Brazil.
Infrastructure for the USA? Socialism!
Those who wish to reduce the ND or balance the federal
budget are fools trying to command the tides. The ND must
grow to fit the needs of a growing population and a
civilization that has never ceased and will never cease
development. That's the best we can do.
Our nation therefore operates like a home-owner with a
growing family taking on a mortgage debt and making
monthly payments. After a few years, the family needs a
larger home and gets a new mortgage with larger monthly
payments. Always in debt but never in doubt that the
future is bright: that is the home-owner's life and that
is the story of our nation.
Rather than worry about the ND, we should be worried
about our DR. If it is rising, there is no sense in trying
to reduce the ever-growing ND, the numerator; we must
instead borrow to stimulate the economy and increase the
GDP, the denominator, enough to gradually, but
continually, reduce the DR.
Proceed to:
Lecture 20. DEFICIT SPENDING
Thanks for your interest.
Marvin Sussman, retired engineer
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