Today there are a couple of commentaries on the federal budget. One is from Goldman Sachs, worrying that interest cost will eat the budget, and one from Stephen Moore, with the idea that "Obama cut the deficit in half" is crazy.
What's a mother to think?
The simple answer is: Yes.
Yes, the federal budget will dissolve in huge interest costs if nothing is done, and in the worst case if nothing is done we will end in hyperinflation, à la Venezuela.
Yes, it misses the point to say that Obama cut the deficit in half on his watch. Because the federal debt doubled on his watch.
OK. As President Eisenhower said, if you can't solve a problem then make it bigger.
Our big problem is that we spend a trillion dollars a year and more on government pensions. And we spend nearly a trillion and a half dollars a year on health care for old people and the poor.
The first problem is a monstrous injustice. We are saying that the needs of older, retired Americans come first, rather than the needs of young families that are getting the next generation off the ground. On my idea of justice, individual people are responsible for their own retirement savings and they retire when they can afford it. Of course there are going to be people who run out of money through no fault of their own. We, whether we the government or we the charitable or we the children, can take care of that without breaking the national bank. There is an additional benefit to this plan, apart from its justice. And that is that the economy would be borne aloft on a huge flood of savings.
The second problem is also a monstrous injustice. It is nice to provide health care for older people, and it is nice to provide health care for the poor. The trouble is that when you decide to do it with government it means that you do it with administrative bureaucracy. And that means, according to the theory of regulatory capture, that the health system gets run in the interest of the health care providers rather than the interest of health care consumers. It means that the health care system gets mewed up in thickets of government protocols and mandates and credentialization. So the health care system becomes incredibly expensive and learns how to respond to government mandates rather than consumer preferences. I don't know what health care would look like if it was basically driven by consumer demand, i.e. what individual consumers, backed up by catastrophic health insurance, wanted with their individual spending on health care. Maybe someone should write a book or make a movie. But we the government and we the charitable and we the children could still take care of people that couldn't afford health care through no fault of their own.
So my view is that the government should not occupy the commanding heights of pensions and health care. Pensions and health care are important social functions that should be the responsibility of individual people, who would be much the better for taking care of their own instead of having it taken care of, rather badly, by the ruling class. Put it this way: saving for your own retirement builds character.
Regarding the deficit and the debt, the basic facts are that in 2008 the US went through a once-in-a-generation financial crash, where the credit system almost seized up. In such a situation, according to Reinhart and Rogoff in This Time is Different, the national debt usually doubles. That's because the way to get out of a financial crash in which the whole credit system seizes up is for the government, through the central bank, to act as lender of last resort and basically nationalize the credit system for a while. And that is what happened: with TARP (at $700 billion in lending) and with various credit guarantees totaling $20 trillion, the government stabilized the financial system. And it was all in place before Obama was inaugurated in January 2009. I would say that Obama enacted the wrong policies in 2009, with a Keynesian stimulus and then the dead hand of Obamacare. But at least we enjoyed a modest recovery from the Crash. It could have been worse.
Yes, but how do we prevent this sort of thing in the future?
The proximate cause of the Crash of 2008 is that the financial system discovered, rather too late, that the derivatives based upon the mortgage bonds of government housing finance giants Fannie Mae and Freddie Mac were not sound because the mortgage bonds of Fannie Mae and Freddie Mac were not sound. In the 1990s and 2000s the government mandated that Fannie Mae and Freddie Mac lend, more and more, to sub-prime borrowers. By the time of the crash, over 50 percent of mortgages financed by Fannie and Freddie were to sub-prime borrowers. This is a problem, according to Walter Bagehot in Lombard Street, published in 1873. The credit system is founded upon two notions. The first notion is that borrowers are able to service their loans. Obviously, sub-prime borrowers are not really able to service their loans if interest rates rise or if they lose their jobs. The second notion is that loans should be properly collateralized so that if the borrower fails to service the loan then the lender can sell the collateral to recover his principal. If people in the market start to question the ability of borrowers to pay their loans and/or question whether loans are properly collateralized then you get a crisis of confidence and the credit system seizes up. So, in 2008 we had borrowers that could not service their loans and we had low-down-payment loans that could not be properly liquidated. Really, we are lucky that the Crash of 2008 was not much worse than it was.
So what, you might ask, should government look like in the best of all possible worlds?
It is simple. The national government should only spend money on defense. In the case of war it should raise taxes and borrow money. After the war it should cut defense spending and reduce the debt. That is all. And its central bank should help finance the war and act as lender of last resort in the case of the once-in-a-generation financial panic. That is all. The government should not use its power to game the credit system with loans to its supporters.
Of course, this is all fantasy. The reality of life on this planet is that we the people are always petitioning the government to pull our chestnuts out of the fire when we get into a little trouble. But that is mere bagatelle compared to the sins of the ruling class. The ruling class is always using the government to fight the war to end all wars, whether fighting the Kaiser, fighting the Nazis, or fighting racism, or fighting global warming.
And it will be ever thus.
What's a mother to think?
The simple answer is: Yes.
Yes, the federal budget will dissolve in huge interest costs if nothing is done, and in the worst case if nothing is done we will end in hyperinflation, à la Venezuela.
Yes, it misses the point to say that Obama cut the deficit in half on his watch. Because the federal debt doubled on his watch.
OK. As President Eisenhower said, if you can't solve a problem then make it bigger.
Our big problem is that we spend a trillion dollars a year and more on government pensions. And we spend nearly a trillion and a half dollars a year on health care for old people and the poor.
The first problem is a monstrous injustice. We are saying that the needs of older, retired Americans come first, rather than the needs of young families that are getting the next generation off the ground. On my idea of justice, individual people are responsible for their own retirement savings and they retire when they can afford it. Of course there are going to be people who run out of money through no fault of their own. We, whether we the government or we the charitable or we the children, can take care of that without breaking the national bank. There is an additional benefit to this plan, apart from its justice. And that is that the economy would be borne aloft on a huge flood of savings.
The second problem is also a monstrous injustice. It is nice to provide health care for older people, and it is nice to provide health care for the poor. The trouble is that when you decide to do it with government it means that you do it with administrative bureaucracy. And that means, according to the theory of regulatory capture, that the health system gets run in the interest of the health care providers rather than the interest of health care consumers. It means that the health care system gets mewed up in thickets of government protocols and mandates and credentialization. So the health care system becomes incredibly expensive and learns how to respond to government mandates rather than consumer preferences. I don't know what health care would look like if it was basically driven by consumer demand, i.e. what individual consumers, backed up by catastrophic health insurance, wanted with their individual spending on health care. Maybe someone should write a book or make a movie. But we the government and we the charitable and we the children could still take care of people that couldn't afford health care through no fault of their own.
So my view is that the government should not occupy the commanding heights of pensions and health care. Pensions and health care are important social functions that should be the responsibility of individual people, who would be much the better for taking care of their own instead of having it taken care of, rather badly, by the ruling class. Put it this way: saving for your own retirement builds character.
Regarding the deficit and the debt, the basic facts are that in 2008 the US went through a once-in-a-generation financial crash, where the credit system almost seized up. In such a situation, according to Reinhart and Rogoff in This Time is Different, the national debt usually doubles. That's because the way to get out of a financial crash in which the whole credit system seizes up is for the government, through the central bank, to act as lender of last resort and basically nationalize the credit system for a while. And that is what happened: with TARP (at $700 billion in lending) and with various credit guarantees totaling $20 trillion, the government stabilized the financial system. And it was all in place before Obama was inaugurated in January 2009. I would say that Obama enacted the wrong policies in 2009, with a Keynesian stimulus and then the dead hand of Obamacare. But at least we enjoyed a modest recovery from the Crash. It could have been worse.
Yes, but how do we prevent this sort of thing in the future?
The proximate cause of the Crash of 2008 is that the financial system discovered, rather too late, that the derivatives based upon the mortgage bonds of government housing finance giants Fannie Mae and Freddie Mac were not sound because the mortgage bonds of Fannie Mae and Freddie Mac were not sound. In the 1990s and 2000s the government mandated that Fannie Mae and Freddie Mac lend, more and more, to sub-prime borrowers. By the time of the crash, over 50 percent of mortgages financed by Fannie and Freddie were to sub-prime borrowers. This is a problem, according to Walter Bagehot in Lombard Street, published in 1873. The credit system is founded upon two notions. The first notion is that borrowers are able to service their loans. Obviously, sub-prime borrowers are not really able to service their loans if interest rates rise or if they lose their jobs. The second notion is that loans should be properly collateralized so that if the borrower fails to service the loan then the lender can sell the collateral to recover his principal. If people in the market start to question the ability of borrowers to pay their loans and/or question whether loans are properly collateralized then you get a crisis of confidence and the credit system seizes up. So, in 2008 we had borrowers that could not service their loans and we had low-down-payment loans that could not be properly liquidated. Really, we are lucky that the Crash of 2008 was not much worse than it was.
So what, you might ask, should government look like in the best of all possible worlds?
It is simple. The national government should only spend money on defense. In the case of war it should raise taxes and borrow money. After the war it should cut defense spending and reduce the debt. That is all. And its central bank should help finance the war and act as lender of last resort in the case of the once-in-a-generation financial panic. That is all. The government should not use its power to game the credit system with loans to its supporters.
Of course, this is all fantasy. The reality of life on this planet is that we the people are always petitioning the government to pull our chestnuts out of the fire when we get into a little trouble. But that is mere bagatelle compared to the sins of the ruling class. The ruling class is always using the government to fight the war to end all wars, whether fighting the Kaiser, fighting the Nazis, or fighting racism, or fighting global warming.
And it will be ever thus.
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