The Debt Debate Continues

And the battle for fiscal sense rages on.  Last night, the President took his message to the people and urged them to get involved with this issue.  Interestingly, absent a looming presidential election cycle the people’s opinions did not matter all that much when his expensive health care plan was making its way through a single-party Congress a couple of years ago.  But I digress.

In a previous posting I presented some of the ethical concerns regarding the current debt debate.  Now let us consider some of its practical issues.  As virtually everyone knows by now, the basic line in the sand separating the two parties’ approaches concerns cutting expenditures and raising taxes – specifically the tax rates of the wealthy (whatever that measure will mean).  For sake of the argument, suppose we raise tax rates on the wealthiest Americans by a significant amount.  The practical question that must be answered is, will this solve the problem that both sides (and hopefully every American) acknowledge – that our nation’s debt is untenable and dangerous to our future prospects.

Given that the United States is the most prosperous nation in history it follows easily enough that it also produces the most annual tax revenue in history.  Yet despite this, our nation is so infested with special interests that politicians of all partisan walks, in order to cater to their respective electorate’s particular demands, have run a tab of well over $14 trillion to date.  The Treasury Secretary has pulled a date of 2 August out of thin air and assures us that if a deal to raise the legal debt ceiling is not reached by that time the nation will default on its credit obligations (a disingenuous point that I addressed previously as well) .  Does this not resonate as glaringly problematic to anyone, that we must borrow more in order to pay the debt we already owe?  Is this not indicative of a significant need for mindset reform?  If nothing else, this clearly indicates that more money going through the government’s coffers is not likely to realistically address the problem.  If anything, it demonstrates that more revenue obtained by the government only rationalizes more spending, rather than encouraging payments toward overall debt reduction.  Despite its implied promises, the government just cannot be trusted to do the right thing even if it were not unethical to confiscate more private property to apply to the debt.  The only way to halt this runaway spending train – the causal factor that both sides agree on, publicly at least – is to starve the entity of its resources and force its hand (consider it analogous to an alcoholic’s intervention).

It is certainly true that some individuals and corporations in the highest tax brackets end up paying far less than their incomes should dictate (to be clear, this is a legal point not an ethical one) – a product of tax loopholes and deductions that are worked into the tax code.  General Electric is an excellent example of such a company.  The largest corporation in the United States, GE reported $5.1 billion in domestic income in 2010 but not only avoided paying any taxes but actually received about $3 billion in tax benefits.  If deductions are to continue, and there is no indication that proponents of the current progressive tax structure are willing to forego them, then increasing the highest tax rate will cause another problem for those in the middle class that think such an approach will not adversely affect them.  As the spending goes up commensurate with the higher tax rates, as it always has and does, and the actual monies from these rates fail to materialize*, that new deficit burden falls on – you guessed it – the middle and lower classes in terms of direct taxes and monetized debt-caused inflation†.

The latest development in this saga is especially interesting.   The major credit rating agencies are reportedly eyeing a downgrade of the nation’s overall rating regardless of whether or not a deal can be reached by Geithner’s faux timeline.  This is because the potential downgrade is not tied to Congress achieving a deal but is in fact tied to the massive amount of debt we have on the books and our collective lack of interest in substantively addressing it that this amount signifies.  If true, this poses another question altogether – why raise the ceiling at all?  Certainly there would be no immediate gain from doing so, other than to perpetuate the irresponsibility that got us to this point in the first place.  This is my favored approach, as it would force politicians to make the most objective, albeit difficult politically to be sure, choices with regard to the nation’s fiscal policy going forward.  Without a new debt ceiling, by definition new debt cannot be accumulated, which is a win for proponents of principled economics.  There really is nothing wrong with government living within its means, especially when those means are the people’s property and not its own.

Inevitably, tough choices are going to be made I think.  Whether we are proactive and make them now to help address the problem or whether we are reactive and let the problem make the choice for us, the result is likely to be similar.  Ultimately, this means people are going to have to take more responsibility for their individual lives if we hope to leave some semblance of an economy for our children and grandchildren to benefit from (unless of course, this is not a concern).  As Samuel Johnson pointed out, “The reigning errour [sic] of mankind is, that we are not content with the conditions on which the goods of life are granted.  No man is insensible of the value of knowledge, the advantages of health, or the convenience of plenty, but every day shews [sic] us those on whom the conviction is without effect.”

It is interesting to observe the eerie foresight of this warning as well, issued in 1788:

Under this authority [to borrow money unlimitedly], Congress may mortgage any or all the revenues of the union, as a fund to loan money upon; and it is probable, in this way, they may borrow of foreign nations, a principle sum, the interest of which will be equal to the annual revenues of the country.  By this means, they may create a national debt, so large, as to exceed the ability of the country ever to sink.  I can scarcely contemplate a greater calamity that could befall this country, than to be loaded with a debt exceeding their ability to ever discharge.  If this be a just remark, it is unwise and improvident to vest in the general government a power to borrow at discretion, without any limitation or restriction.

*The richest among us, both individuals and corporations, love deductions and loopholes.  They can afford to pay the best and brightest tax attorneys and accountants to avoid as much of their tax burden as possible and this methodology is quite effective.  In fact it is so effective that some of the richest entities, such as GE, actually lobby for higher tax rates because they know they can largely avoid the real monetary impact when their smaller (and often cheaper) competitors often cannot.  Imagine that – lobbying the government (successfully I might add) to put your competition out of business through misdirection to the public.  Even in the case of individuals, the middle and lower classes simply cannot afford the expertise required to avoid their tax burdens, so in a sense the progressive tax code actually encourages the highest earners to, in some cases, pay lower proportional rates than their less wealthy compatriots.

†In short, monetizing the debt is a nefarious means by which the Federal Reserve purchases government debt, and does so by “introducing” new fiat money into circulation.  This is accomplished by converting debt into new paper money rather than purchasing it with preexisting currency in the environment, as is done when private entities purchase debt.   The Fed obtains government bonds – the vehicle by which the government obtains credit – with money essentially created out of thin air, with no basis for its creation.  In essence, this process introduces more paper currency into the economy that is based on no commodity and thus has no intrinsic value, thereby debasing the current money supply’s purchasing power by increasing the supply in circulation.

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