Tag: Fiscal Policy

MLLG

Continuing Coverage of the Spending Crisis . . . The Spending Crisis May Already Have Begun

George Noga

To control inflation, the interest rate must be higher than the inflation rate.

Continuing Coverage of the Spending Crisis . . .

The Spending Crisis May Already Have Begun

By: George Noga – May 15, 2022

For 15 years I have warned of a crisis of spending, debt and deficits, which I call the spending crisis because its root cause is spending. At first, I cautioned about a possible crisis and in recent years, a likely crisis. Once the debt ratio blew past 90%, it became an inevitable crisis. The only remaining questions are when will the crisis begin and how will it unfold. We know the crisis will not be transient and will result in a lost generation. It will end only when all excess debt is purged and taxes and spending are brought into balance, a lengthy and tortuous process that will transform America.

I often wrote that the crisis is likely to start suddenly and unexpectedly. I have used the example of a seemingly innocuous posting on Bloomberg going viral and, by the end of the day, the market for US government debt evaporates. That may still happen, but there is another – perhaps more likely – scenario. The crisis could begin stealthily and only in hindsight will we recognize it was the beginning of the crisis. There is, in fact, a very solid basis to believe that the spending crisis may already have started.

In chaos theory, complex systems like the US economy are inherently unpredictable. Small and seemingly insignificant events can lead to profound and non-linear impacts over time. In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a system results in large differences in later states, i.e. a small change in initial conditions cascades to a cataclysmic event. Thus, the present inflation could cascade into a life-altering crisis.

The true cause of the present inflation may not be monetary policy, but fiscal policy, i.e. spending, debt and deficits. When government debt exceeds what people expect can or will be repaid, they spend in the belief everything will be more expensive in the future. This drives up the price of all goods and services. If our present inflation is indeed being driven by fiscal policy – either entirely or in significant part – it can only be fixed via fiscal policy, i.e. higher taxes and/or draconian spending cuts. Further, that means that our present inflation is indeed signaling the start of the spending crisis

There are two, and only two, possibilities. The first is for the Fed to let inflation go unchecked, either intentionally or (more likely) by taking half-measures, i.e. to raise rates too little and/or too slowly. This will result in long term inflation which is the cruelest tax of all – and leads to social unrest and political extremism. This possibility will bring about the spending crisis. Of course, 100% inflation over say 10 years would cut the deficit in half. However, even halving the deficit would not end the crisis; the US still would be running a humongous fiscal deficit and would be back at square one.

The second possibility is for the Fed to jack up interest rates to counter inflation. To get inflation under control, interest rates must exceed the inflation rate. The last time the US had high inflation, the Federal Reserve had to raise rates to 20% to control 14% inflation. Imagine what would happen now if the Fed raised rates to say 15% to control our present inflation of 10%. That would cause a severe recession that adds many trillions to the debt. Moreover, it would not prevent the spending crisis.

Let’s recap. If the present inflation continues long term, social and political cohesion will disintegrate just as it has in other countries – the Weimar Republic comes to mind. If the Fed takes drastic action to halt inflation, that leads to a crisis as shown supra. Also, remember that if inflation is being caused by fiscal policy – it can only be fixed via fiscal policy. There is no way out of this situation. Either way, it is checkmate.

Following are the Five Main Takeaways

  1. If something cannot go on forever, it won’t.
  2. To tame inflation, the interest rate must exceed the inflation rate.
  3. The crisis ends only after excess debt is purged and the budget is in balance.
  4. If inflation is caused by fiscal policy, it can be ended only via fiscal policy.
  5. At its heart, it really is a moral crisis; rather than control our spending, we chose to borrow from future generations – and for all the wrong reasons.

There is a solid basis to believe the spending crisis has begun, but we will know for certain only in hindsight. No bells will toll to announce the start of the crisis.

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Next on May 22nd: The political outlook for 2022 and 2024.
More Liberty Less Government – mllg@cfl.rr.com – www.mllg.us
MLLG

The Panacea of Economic Growth

George Noga
By: George Noga – November 1, 2014
       Throughout its 238 years, the US economy has grown by over 3.0% annually, although data for the early years are problematic. For the 60 years from 1940 to 2000, the US economy grew at a rate of 3.6%. For the following 14 years from 2001 to the present, GDP grew by 1.8%, exactly half that rate. If growth remains tepid, Americans will not recover the ground they lost and their children and grandchildren will, for the first time, be worse off than the previous generation.
        America has transmogrified into Europe which is in permanent recession due to its failed economic policies. Even stalwart Germany is beginning to stagnate. France is destroying its economy in a fit of socialistic angst. Italy has a lower GDP per capita than it had 15 years ago. Meanwhile in Brussels, Jean-Claude Junker continues to strangle EU countries with bureaucrats and regulations. In Europe a 2% growth rate is seen as optimistic, 1.5% as acceptable and no growth as possible. The average European in one generation fell 25% behind the average American due solely to differences in GDP growth. As I wrote last month, just in the past 5 years, the average American has been impoverished by 17% due to the low growth rates coming out of the recession compared to the historic growth rates in similar times. In short, we already have become like Europe although Europe continues to plumb ever new depths. We are well along in suffering a lost decade on the path to a lost generation; our progeny, like Europeans today, will lead lives of quiet desperation.
“Failure to grow America’s economy is a choice; decline is not inevitable.”
        Failure to grow our economy is a choice; decline is not inevitable. It is a choice made by our political leaders solely because they prefer to demagogue inequality, class warfare and corporate profit for perceived electoral gain. It is a choice made by the media because they are lazy, economically illiterate and prefer to flog dead camels. It also has been a choice made by ordinary Americans in the voting booth for all of the aforementioned reasons advanced by politicians and the media. There are strong signals however that ordinary Americans now are beginning to want economic growth.
Economic Growth as the Panacea

        As trumpeted by the headline of this blog post, economic growth is a panacea; indeed, it is the only solution for every problem (real and perceived) that we face today and for the coming generation. It is apropos that Panacea is the Greek Goddess of healing because strong economic growth will heal everything; to wit:

  • The crisis of spending, debt and deficits: A sustained period of strong economic growth (combined with some spending restraint) will enable the US to restore fiscal balance and to stabilize its debt thereby gradually lowering the Debt/GDP ratio to its long-term historical level of around 30%.
  • Climate change and environment: If in the distant future climate change causes some issues, the best antidote is a vibrant economy that will easily enable us to spend whatever is needed to mitigate any such problems.  Only countries with strong economies can afford to spend copiously on the environment.
  • National security: The single greatest asset (weapon) we possess for our national security is a growing, resilient economy. This enables us to spend whatever is necessary to deter any possible adversaries and to defend ourselves should that be necessary. Weakness invites aggression and fosters terrorism.
  • Jobs, poverty and inequality: It is economic growth, not government, that creates jobs. It is sustained growth that fulfills the American dream and eliminates poverty; moreover, growth is the great equalizer.
  • Unfunded mandates: The USA is facing $350 trillion (over one-third of a quadrillion) in unfunded commitments in the next 50 years for Social Security, Medicare, government pensions, Obamacare and other programs.   Absent  a high rate of growth, these promises not only cannot be kept but will require drastic reductions in programs.
Recipe for Economic Growth

      Okay, so economic growth is the panacea; what must we do to achieve it? The answer is straightforward and attainable. If we do the following  we will achieve vigorous, long-lasting economic growth.

  1. Political consensus: Probably the single most difficult hurdle for achieving growth is reaching a political consensus. Politicians and the media must agree to pursue policies that maximize growth and agree to stick with such policies for the long term. They can continue to argue over how to divide the wealth that results; that is what politics is about. Absent some consensus however, achieving sustained growth becomes problematic.
  2. Tax and fiscal policy: Taxes (personal and corporate) must be reduced, simplified and stable. People and businesses must be able to plan ahead and certainty about taxation is indispensable to investment and job creation. In the same vein, spending needs to be restrained.
  3. Eliminate uncertainty: Business hates uncertainty; it stifles planning and results in gridlock. There needs to be a broad and sustained political understanding about taxes, regulations and new initiatives.
  4. Sound money: The Fed should focus only on maintaining sound money and fighting inflation. A strong, stable and sound dollar are indispensable for a vibrant economy.
  5. Regulation: The economy is being strangled by regulation and litigation. We need to have a moratorium on new regulations while we gradually reform and roll back existing ones. Our tort system needs to be reformed.
  6. Energy: We should develop every possible energy source including ANWR, offshore and shale and natural gas on federal and state lands. We should export LNG immediately from many terminals and, of course, construct the Keystone XL Pipeline. Such a policy will create jobs, make us energy independent, stimulate the economy and, importantly, prove to be a potent weapon in keeping Putin and Russia in check.
  7. School choice: I include this because educated, trained workers are a potent economic resource. Further, school choice will bring about more equality and reduce poverty. It also is a panacea.
     The choice is ours. We can continue on our present slow growth trajectory which will condemn future generations to a downward spiraling economy and reduced living standards; they will experience untold miseries as the crisis of spending, debt and deficits culminates in a meltdown. They will inhabit a Clockwork Orange nation drowning in taxes, regulation and uncertainty. They will have part time jobs for low wages. At best they will collect 65% of the present Social Security benefits deferred until they are age 70; Medicare and Obamacare (also age 70) will be busted; health care rationed and long waits common for poor treatment. They will inherit a volatile, dangerous world where nuclear weapons proliferate, a revanchist, aggressive Putin-led Russia and all without the resources for adequate national defense.
       Or, we can make a different choice; we can choose to reject decline and to embrace high-growth policies. This would lead to a virtuous circle of better education, abundant and cheap energy, and to a far safer and more secure nation and world. It would result in fixing the debt crisis and funding all the promises we have made for the future. Most of all, it would help ordinary Americans. As year after year of high growth enriches America, the politicians can fight over how to best divide up this cornucopia – including addressing any inequality issues.
       Firstoff however, we must make the right choice. This gets us right back to the heart of Alexander Hamilton’s question: “Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.” Is America today still capable of putting politics aside when self preservation is at stake? Or, do we heed the Siren song of politicians advocating failed ideologies, searching for Utopias and demagoguing political correctness, class warfare and inequality?