The Insanity of Washington Economics

The new budget numbers have been released.  $3,800,000,000,000 (3.8 trillion).  The Congressional Budget office (CBO) says that if current laws and policies remain unchanged, the federal budget would show a deficit of $1.35 trillion for fiscal year 2010.  They are also projecting that total debt will reach $8.8 trillion by the end of 2010 which is 60% of GDP.  This is the highest it has been since 1952 and the CBO believes that will climb to 67% by 2020.  As the debt goes up, the interest payments on the debt will likely skyrocket.  They project it will triple between 2010 and 2020, increasing from $207 billion to $723 billion.  If I ran my budget this way, I would be living in a cardboard box under a bridge somewhere.

Below are charts from the Heritage Foundation.  The first one shows how federal spending is growing faster than federal revenue.  Since 1965, federal tax revenues have increased by more than $1.5 trillion and spending by $3.3 trillion.  In 2009, federal revenue dropped while federal spending increased by over $1 trillion.  This is unsustainable.  Somewhere somehow, you reap what you sow. The Piper needs to be paid.

The next chart is even bleaker.  Federal spending has increased 221% since 1970 and median income just over 32%.  We are spending nine times faster than incomes are increasing.

In an article by Doug French called Illusions of the Age of Keynes, he brings to light the Keynesian Economics mindset of Washington.  He says,

“The president’s other top economic advisors — Larry Summers and Christina Romer — have been described as neo-Keynesian and “have made clear by their actions that they view the private sector, left to its own devices, as incapable of sufficiently investing in education, health care, infrastructure, energy and other areas of national well-being,” wrote Horowitz. “They warn that in absence of a greatly expanded public sector (this means bigger federal government); the current business downturn will be even more prolonged and painful.”  Washington continues to have faith in government expenditure correcting the downturns of private investment.” Emphasize added.

Showing the insanity of federal government economics, he gives us a look at the economic crisis experienced by Japan.  Between 1986 and 1987, the Bank of Japan cut interest rates six times which caused one of the largest domestic bubbles in the world.  At one time the Japanese stock market was bigger than the U.S. Stock Market.  However, just like with all bubbles created by government manipulation, the bubbles burst.  In the 1990s, Japan slashed interest rates to zero and tried 10 fiscal stimulus packages totaling more than 100 trillion yen.  They all failed to cure the recession.  Would they learn that this doesn’t work – No.  The Japanese government passed additional stimulus programs in 2008 and 2009.  What was the result of all this?  “Japan’s GDP at the end of this year will be no higher than it was in 1992 – 17 lost years.”

So why do Washington officials insist upon doing the same erroneous things over and over?  There is a saying that goes, “Insanity: doing the same thing over and over again and expecting different results”.

Murray Rothbard said in “America’s Great Depression” that in an economic downturn, the positive things that government can do is “drastically lower its relative role in the economy, slashing its own expenditures and taxes, particularly taxes that interfere with saving and investment.”  A reduction in the tax and spending levels will automatically increase saving and investment, “thus greatly lowering the time required for returning to a prosperous economy”.

Doug French says, “Instead of the government expanding its size and reach, propping up failed businesses, lowering interest rates to zero, printing money, and attempting to dictate which sectors of the economy thrive and which fall by the wayside, the proper governmental policy in a depression is strict laissez-faire, including stringent budget-slashing and coupled perhaps with a positive encouragement for credit contraction.  (Credit contractions are attempts to minimize or limit the amount of credit that is currently available to consumers. The use of a credit contraction is normally associated with the desire to slow the rate of inflation in the general economy. By creating a state of recession, credit contractions help to slow or even possibly stop any growth of inflation for a period of time.)

Ludwig von Mises wrote, “There is no means of avoiding the final collapse of a boom brought about by credit expansion (which the federal government creates).  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The Keynesians in Washington say they can stimulate the economy.  But you cannot print prosperity and you can’t spend your way to prosperity.  You and I know that the way you fix the economy is by tightening your fiscal belt and spend within your means.

Related posts:

1. Obama’s New-found Fiscal Restraint
2. Number one, we inherited a $1.3 trillion deficit….
3. More Funny Funny Money
4. The Making Work Pay Tax Credit: Spare Change That They Want Back!
5. Revenge of the Porkulus