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Wednesday, April 28, 2010

National Debt Debate: Common Sense vs. Progressive Economists

In this video, progressive economist Professor Dr. James Galbraith argues that the national debt is simply not something we need to be concerned about. Here, he takes a position against what most of us would call "common sense." Granted, sometimes "common sense" is simply wrong. But not here.

I find his argument wrong, and offensive. Common sense tells us that you cannot spend what you don't have, and that it is morally wrong to take from other people without some form of consent.

First, every taxpayer owes $117,000 on the debt. That means that, for most taxpayers, their largest liability is not their house or a business--it is their share of the national debt. In return, does the federal government provide more than anything else in people's live? Certainly not, at least for a large portion of the debt. For example, the U.S. owes almost $2 trillion in just interest payments alone.

Statement of Principle: People's resources should be locked up in what they choose--which is generally involves something productive or of some instristic value such as various investments or savings of wealth -- not feeding politician's reckless spending.

The first problem with the debt is the moral problem. Most people in this country did not voluntarily take this debt, yet they have to pay for it. Second, an extraordinary portion of government spending is pure waste. Also, our children have to pay for it, which has become known as "generational theft."

The second problem is the common sense problem. If spending unlimited amounts of money was productive, then no country (or person for that matter) would ever have debt problems! Its easy to spend more money and put it on a credit card. In fact, many fallen nations have tried.

The professor's main argument is that, unlike most entities, the U.S. can always print more money. In his professional writings, some of which I have read, he argues that this will not cause inflation. He ridicules economists who say that you can only print so much money.

This makes perfect sense if you adopt the progressive economist's premise. If spending money will make things better, than why not spend more money? Why stop at $2 trillion as President Obama did? As Paul Krugman has insistently argued, why not spend more?

Well, the fact is that these things only work in the SHORT TERM. Its just like borrowing from a credit card to pay your bills and live affluently. In the LONG TERM, it catches up with you. This is what economic bubbles are--and this is how we got the .com bubbles and especially the recent housing bubble.

The government now wants to create a government bubble. It is borrowing heavily, thinking that these short terms gains will never catch up with them, because they can print more money. The professor argues that there will be no inflation and the world will continue to respect the dollar.

I think he is mostly wrong. The U.S. can probably still print quite a bit of money to deal with its fiscal difficulties. However, at some point--I don't know where it is--but at SOME point, inflation will kick in and the world will stop respecting the dollar. They'll stop financing U.S. spending by allowing devalueation of their dollar holdings. Plus, they'll stop loaning money--why would they loan you money, when you pay them back in increasingly worthless paper? Several nations are already making moves to use an alternate currency, because they want a stable currency that does not lose its value.

The U.S. has gotten away with this for a long time, because most of the rest of the world destroyed itself, through war and inflationary monetary policy (i.e. largely what the U.S. is doing right now). The world needed a stable currency with value, and the dollar provided it. But the world now sees the U.S. is taking advantage of this status to finance a lot of spending that only benefits the U.S.'s own special interests. Also, the rest of the world is starting to rebuild itself.

In the end, the "fear-mongering" about the debt is exactly what we need. We need people to be very afraid of this, because it will encourage the people to elect politicians who will address the issue. This is hard because people generally want more government spending and less taxes--the ultimate paradox. But America has been responsible about this before, and we can again.

We merely need to ensure that "common sense" wins, in the battle between common sense and progressive economists. And that's not to say the Friedmans and Hayeks are always right--rather, I merely assert that common sense dictates that government spending is merely a short term solution, and meets with heavy diminishing returns at some point.