Sunday, July 31, 2011

Washington Makes A Deal.

Horray! Washington stuck a deal, and while we are still running budget deficits, at least we won't default on our debt. While I am sure that my favorite senator will vote against the bill, it is a good thing for us, especially when considering how bad a default could have been.

I would liken our debt problem/Keynesian spending binge to that of a long time addict on heroin. You simply can't take the addict off of heroin, you have to ween them off using other drugs... likewise, pulling $1.5 trillion dollars out of the economy (roughly, our deficit) would be disastrous, even if it is borrowed or printed money.

With that said, it is vitally important that we balance the budget and start paying off our debt, and soon at that. While I am abhorred by the state of our federal government, I am not so blinded by ideology to actually believe a cold turkey solution is desirable.

EDIT: I probably didn't make my point clear enough. My big fear, is that immediately balancing the budget will create so much short term pain that it will make for an unpredictable ballot revolution (the likes of which that put Rand Paul into the Senate, would look like nothing), which, could potentially make our society (and the world) unstable... It is my belief that a stable society is an important thing, and when you have an ideology that is not wholly mainstream (say, the TEA Party) exerting such a control over the whole country, it can make for some dangerous and undesirable reactions in the other direction.

We have been threading the needle for a long time, and, there is no doubt that getting out of debt is necessary, but, I believe that we need to do so in a responsible manner.

4 comments:

Taylor Conant said...

Jeff,

With all due respect, your post is an example of operating on the premise of a free lunch.

Defaulting on the debt ("cold turkey") would be financially and likely economically painful in the short term. No doubt.

But the alternative is not a "solution" nor sustainable, either.

A balanced budget can still grow. Government debt, whether part of a balanced budget or an ongoing deficit, still represents resources forcibly expropriated by the government from the private sector. It represents a shifting of real wealth at best and a loss to society at worst.

The government produces no wealth of its own. Even if the budget is balanced, it is long-term unsustainable because a person or organization that does not produce a profit has no means to payback its debts.

All this deal does, and all any deal could've done, is buy the politicians a little more time before the next crisis. It has not prevented a crisis and it has not put us on the path of preventing future crises.

This isn't about ideology. It's about a proper understanding of economic law and reality.

I hope I haven't been overly ideological in pointing this out.

jeff said...

Tayor,

Thanks for the comment. I always enjoy talking with you. :)

I probably didn't state very clearly what I meant (I will add in an "edit"). I certainly understand that there is no free lunch here. However, if were were to simply balance the budget, it would likely create so much pain in the short term, that there would be a major ballot revolution due to the economic hardship that would come about.

In that event, there is no way of telling who/what would come to power. Frankly, when looking at history, that is more terrifying than anything... especially when most of the voting public probably can't coherently explain why the US losing it's AAA rating would make interest rates rise.

Furthermore, the voting public probably can't explain what gives our dollar value, or lack there of.

When situations like this arise, I fear that they would vote for the politicians that give them a solution like "America is a great country, we have always survived, and will continue to... go to the mall, spend money, get in debt... it's good for you!"

I am in favor of the government running surpluses, selling off federal land, and virtually anything else in order to get out of debt in a responsible manner, that keeps our society (and the world) stable.

Taylor Conant said...

Hi Jeff,

Your fears are entirely valid. I don't dispute your right to feel the way you do about the future. I realize fear is often a more powerful stimulant for the imagination than hope.

The point I was trying to make is separate from the question of what the potential political consequences might be of the government failing to make a deal in this instance.

The point I was driving out was, I had hoped, a modest one: regardless of those potential consequences or any other, it can not be said in an economic sense that the benefits of delaying the inevitable default of the US government outweigh the costs, or worse, it can not be rightfully implied that delaying that default has few or no real consequences while allowing it to happen now is the only scenario where society experiences discomfort.

In delaying this default, what is being exchanged is a bigger problem tomorrow for a lesser problem today. In essence, there is no free lunch. The question is, "Economically speaking, is it better to suffer the consequences of a government debt default today or tomorrow?"

The political consequences are another matter. I personally dispute your opinion on this subject as well but don't think that the comments of this blog post are the appropriate forum for sorting something like that out. I also don't think I want to do battle with a man's imagination, especially as it regards the future, which is of course always uncertain. I'd rather do battle with his reason over a concrete subject that is resolvable through logical consideration.

Have you read this piece by Leonard Read? I think it sums up the nature of what I was driving at in my first comment. I hope you enjoy it.

jeff said...

I enjoyed the piece that you linked to. While I have no problem with discussing the matters addressed on here, I respect your wish to not.

Feel free to email me.