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End the Budget Deficit, End the Fed

Politics / Central Banks May 08, 2010 - 05:27 PM GMT

By: Gary_North

Politics

Best Financial Markets Analysis ArticleFrom time to time, someone asks me: "What would you do about the Federal deficit?" I have this amazing answer: "End it immediately. Then run a surplus until it is paid off 100% – exactly as I would do with my own budget."


Of course, this assumes that I was ever put in charge of the Federal government's checkbook. That would be unlikely. It would also be revolutionary. I don't believe in political revolutions. Revolutions make things worse. They require centralized power and violence – a point that Karl Marx's collaborator, Frederick Engels, made clear in his 1874 essay, "On Authority." He wrote: "A revolution is certainly the most authoritarian thing there is; it is the act whereby one part of the population imposes its will upon the other part by means of rifles, bayonets and cannon – authoritarian means, if such there be at all; and if the victorious party does not want to have fought in vain, it must maintain this rule by means of the terror which its arms inspire in the reactionists." That is not my agenda.

When free market economist Ludwig von Mises was asked what he would do if he were put in charge of the economy, he replied with one word: "Resign." That was the correct answer.

We need to think carefully about what civil governments are and are not. Civil governments are not like individuals. They are irresponsible in ways that individuals never can be, because other individuals will intervene to stop irresponsible individuals before they inflict harm on everyone around them. So, we do what we can to call government irresponsibility to the attention of others. We fight battles that we can win, or at least might win, which are few and far between in the latter stages of national irresponsibility, which we are obviously in.

A successful political battle begins with ideas. So, in the name of responsibility, but not in the name of political revolution, I offer my program for balancing the budget.

The first step is to acknowledge that government debt is in principle different from personal debt. Government debt is addictive politically in ways that personal debt is not. Government debt applies to different people in different ways, whereas personal debt applies to a debtor who is legally responsible for his actions. Government debt does not have short-term negative feedback in the way that personal debt does.

Think of the Federal government as a local tavern. It is a unique tavern. In this tavern, someone else always pays for the drinks and also suffers any hangovers, decade after decade. The incentive to sober up is remote. "Bartender, set 'em up again!"

Yet it is worse than this. With alcoholism, there is no cadre of experts telling a nation of visible drunks that alcohol is not a major problem if it is consumed responsibly, and then insist that people can stop drinking at any time. But why should people stop drinking in our hypothetical tavern?

The experts in government debt always say this: "If the government begins to reduce its spending immediately, there will be no major problem. If Congress waits, the nation will suffer the consequences. Congress must begin now." But the fiscal drunks have heard this before all of their lives. They consume more, and nothing really bad ever happens. So, they run up the tab. The party goes on. "Bartender, set 'em up again!"

AA AND BOOZE

Alcoholics Anonymous offers a 12-step program for alcoholics. This program has become the basis for organizations dealing with addictions of many kinds. It begins with 12 steps. These steps have one purpose: to sober up the suffering drunk. It does so by demanding that the alcoholic accept personal responsibility for his actions. This responsibility cannot be transferred to anyone else. Without this intense degree of personal responsibility, the AA program could not work. The 12 steps are posted on many sites. Here is the list.

After the individual has confessed to himself and God regarding his own shortcomings, he is told by AA members that he must avoid all alcohol for the rest of his life. For him, it is poison. Others may be able to handle it. He cannot.

He is told to go cold turkey. Sometimes, he is told this after weeks spent in a detoxification program. He has spent time with the famous pink elephants on parade. He is a dried-out drunk. He is ready to listen to reason.

Others experience a moment of truth. They have an experience in which they clearly see what they are and what they will become if they do not change. In "The Days of Wine and Roses," Jack Lemmon sees a reflection of himself in a store window. He does not recognize himself, just a rummy staring at him. Then he sees that it is his own image. That changes him.

I have a friend who had ruined his life with drink. He was in a strange town. He had spent the night drinking himself into a stupor in a motel room. He was waiting to get into a restaurant to have breakfast. The host called out, "Jackson, party of one." That did it. He saw that he had been partying for years, and he was alone. He joined AA immediately. He went to 30 meetings in 30 days. The last time I saw him, he was sober. He gives this testimony publicly inside prisons.

The point is, the person must take immediate action. He may not get a second moment of truth. This is AA's message: You must act responsibly as soon as you recognize your condition. If you don't, you may drink yourself to death. It is a life-and-death matter.

The AA program is geared to staying sober one day at a time. It recognizes that individuals can fall off the wagon. The program welcomes such backsliders back into fellowship, but it does not offer any escape hatch from complete sobriety. It does not accept the possibility of social drinking for its members. It is a zero-tolerance outfit regarding booze, though not zero-tolerance for victims.

ECONOMISTS AND DEFICITS

Economists are believers in the marginal decision. No decision short of suicide is final. No decision short of suicide is total. All decisions are trade-offs between a little of this for a little of that.

Economists are therefore advocates of marginal solutions for all economic problems. There is no such thing as cold turkey for economists. There is no moment of truth that offers a way out, but which, if it is ignored, leads to death. There are no life-and-death decisions for economists, other than suicide.

This is basic for properly understanding economists. If you do not understand this, you will not understand why economists, who should see the devastating cumulative effects of government debt, invariably say that things are not beyond the point of no return. For an economist, now is not the day of salvation. That day is always in the future. For an economist, there is always enough time for getting government debt under control. For an economist, there is no day of national judgment, no day of national reckoning. A business can go bankrupt. An individual can go bankrupt. But a government need not go bankrupt if it has a cooperative central bank or foreign central banks to buy its debt. Such is the teaching of economists, except for Austrian School economists, who know a government drunk when they see one.

For an economist, economic growth will enable government debt to be marketed at some rate of interest. At some rate, there will always be investors. But then, whenever interest rates climb so high as to create a recession, the vast majority of economists demand that the government sell debt to the central bank, which will create fiat money and thereby force down interest rates.

Economists – except for Austrians – hold this view of capital pricing: "The free market is all we need to estimate a return on investment, but whenever a major crisis hits, the government and the central bank must violate the free market principle of competitive bidding."

For the economist, the free market is what we need when government debt does not drive up interest rates, but whenever it does and the economy tanks, the solution is more government debt, higher deficits, and more fiat money. So, on this basis, government debt is not a threat, because the solution to the high interest rates created by government debt is not reduced government debt but rather increased government debt.

For all but the Austrian School economists, government debt must enjoy only positive feedback. No negative feedback is allowed to reduce the level of government debt. Why not? Because such negative feedback produces recessions, which are defined as reduced economic growth, and economic growth is the way that governments are enabled to continue to increase government debt.

Try to find a non-Austrian School economist who calls for the elimination of government debt. You cannot find one. The economist treats government as he treats the individual or business. Debt is seen as a way to gain benefits. People make cost-benefit analyses to decide whether debt will be an advantage. The economist pretends that a government is the same as an individual or a business. It – a collective it – makes cost-benefit analyses for the nation, another "it." But no such being exists. Politicians decide what is good for their careers, and then vote to spend or not to spend billions of dollars. No one can mentally calculate or imagine a billion dollars. No one has seen a billion dollars. But politicians vote to spend trillions each year. The estimated Federal deficit in fiscal 2010 is about $1,500 billion.

Politicians see immediate benefits: the purchase of votes at the next election. They discount future liabilities: the loss of votes, which will occur, if ever, only after they have retired on huge pensions that they have legislated for themselves. High personal benefits in the short run and highly discounted personal long-run costs: Here is how government budgeting works.

Economists believe that government budgeting is essentially the same as personal budgeting. If pressed, they may admit that a Congressman does not calculate costs and benefits as the economists (or their wives) do with their household budgets. Economists rely on the "bond vigilantes" to do this heavy lifting of assessing debt risk and putting limits on it. But bond vigilantes do not have a central bank on their side, which can reduce short-term interest rates and provide stimulus benefits. They have to take on the central bank on the other side of the futures contract – a bank with unlimited money and a government monopoly over money.

Then there are credit-rating firms. We know what kind of job they did with sub-prime mortgage risk, 2004–2008. They do just as good a job with government debt.

The economist spins a child's tale about risk assessment in the capital markets, and then, like a child when the tale turns out poorly, cries for his mother to kiss it and make it all well. The Federal Reserve is one big mother.

MY PROGRAM FOR DEFICIT REDUCTION

Cut spending until income equals outflow. Then cut it some more.

That's it? That's it.

"But what about. . . .?"

This is the universal response that guarantees future government bankruptcies, all over the world. Three words: "But what about," plus a question mark

Nothing in American political history ever since the last year of the Jackson Administration in 1836 has overcome the effect of these three words: "But what about?" There was no national government debt in 1836. Also, that was the last year of the Second Bank of the United States as a government-licensed central bank. Then the recession of 1837 ended the year of debt-free living for Congress. It never happened again.

To head off "But what about?" my recommended reform mandates an across-the-board cut of spending by every Federal agency. No exceptions. Every budget is cut by the same percentage.

"But what about. . . .?" Yes, that one, too.

"But you can't mean. . . ." Yes, I do.

"But that would lead to. . . ." Yes, it might.

"But people would be forced to. . . ." I am sure they would.

"But this idea is utopian." No doubt it is.

I will tell you what else is utopian: long-term Federal solvency

With an across-the-board cut in spending, every special-interest group would be forced to identify itself as a special-interest group. Politically, this is a benefit for cost-cutting. Cost-cutters can then respond: "Are you saying that you won't bear your fair share?" That is exactly what they are saying, but it's embarrassing to be visible about this.

The politics of the fair share is always invoked to promote higher taxes. "Everyone should pay his fair share." And just who is everyone? "The rich."

Tax reform worldwide is always based on this slogan. "Don't tax you. Don't tax me. Tax the man behind the tree."

The public's response to an across-the-board fixed-percentage spending cut would be this: "Don't cut you. Don't cut me. Cut the man behind the tree."

The political justification for an across-the-board cut would be a national debt emergency. But no one in Washington believes that there is a national debt emergency facing us. That is also the economists' outlook. There are only marginal problems.

When the Tea Parties call for an across-the-board fixed-percentage cut in spending, we will know that they are not just another loose confederation of special interests: "Don't cut you. Don't cut me. Cut the man behind the tree."

CONCLUSION

What is the political response to a fiscal world in which there is no day of reckoning this year? Kick the can for another year.

Kick the can guarantees that the fiscal crisis will come. Kick the can is the politics of immediate gratification. It is the politics of never facing the music. It is addictive.

Economists admit that, in theory, there will be a day of reckoning, somewhere, over the rainbow. They say that if nothing changes, there will be national bankruptcy. But they insist that this day is not in the immediate future.

To which Congress cries out: "Set 'em up for another round, bartender. The drinks are on my friends, here." Who are these friends? Insurance companies, commercial banks, money market funds, bond funds, and – above all – central banks. These days, two of them: the Bank of Japan and the People's Bank of China. But when they finally concentrate on buying only their own nations' ballooning debt, the Federal Reserve System will take over as the lender of last resort.

What is my solution to the Federal Reserve System? It is Andrew Jackson's solution: Revoke its federal charter by revoking the Federal Reserve Act. Then demand the return of every ounce of gold at $42.22 (the official price), which will then be minted into tenth-ounce gold coins and sold to reduce the Federal deficit.

End the deficit. End the FED. Do it immediately. Simple.

I know, I know. "But what about. . . ?"

    Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    http://www.lewrockwell.com

    © 2010 Copyright Gary North / LewRockwell.com - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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