Pete Boettke writes . . .

It is a Spending Problem Stupid


The raising of the debt ceiling debate continues in DC. Here is some background information from the Mercatus Center.

Politicians in DC insist they are working hard to work out a deal. But this is not really a question of brokering a deal, it is about coming to grips with the real cause of the debt problem --- excessive spending. Of course, the politicians will tell you that each of their special programs are essential to the welfare of the voting public. And so at best a "deal" coming out of DC will result in a slower growth in excessive spending, not a cut in spending.

But I have 3 broad stroke spending cuts on programs that have proved to be costly and ineffective at meeting their stated goals. I am not asking for a mere cut, but an actually abolition of these programs. Just think of the cost savings:

1. War on Drugs

2. War on Terror

3. War on Poverty


We have to face up to the fact in our public debate that the problem isn't a tax problem, it is not a revenue generating problem; it is a spending problem, it is all about questions of the scale and scope of government. Government has assumed a level of responsibility in our lives that is fiscally irresponsible.

Deficits, Debt, and Debasement | Scott A. Beaulier and Peter J. Boettke | Cato Institute: Policy Report

In 1977 James Buchanan and Richard Wagner warned about the political legacy of Keynesian economics. "Sober assessment suggests that, politically, Keynesianism may represent a substantial disease," the two wrote in Democracy in Deficit, "one that can, over the long run prove fatal for a functioning democracy." If economic policies are not somehow constrained by rules and supermajorities, deficits are the predictable outcome of democracy. "The bottom line: political capitalism is not laissez faire capitalism," they write. "To continue down our current path is to reinforce the perverse folly of politics that has threatened the viability of the current economic system."

Deficits, Debt, and Debasement | Scott A. Beaulier and Peter J. Boettke | Cato Institute: Policy Report

Smash the Ceiling

A Few Random Thoughts

The health care debate seems to have settled on two issues: should Obamacare be repealed? And, how should Medicare be saved from bankruptcy. The democrats are arguing that without the constraints of Obamacare, the costs of Medicare will continue rising. The republicans are arguing that Ryan’s plan to slowly shift the system to one of vouchers and the use of private insurance companies. The democrat arguments against Ryan’s plan are that costs will rise so much that the voucher will be insufficient and the old people will end up without care. This is a great divide between those who have no idea how markets work versus those who want to rely on the market. If the third party payer in Medicare was eliminated, individuals would seek out their best options, private companies would offer policies that those individuals want and are willing to pay for. It would drive prices down not up. Costs would rise no faster than the rise in prices in other sectors.

The debt ceiling debate is also interesting. If the ceiling were not raised, the Treasury would have to figure out how to reduce spending. Since it would want to pay the debt costs, it would have to cut elsewhere. The question is whether there is enough to cut without dealing with Medicare and Social Security. Looking at the data, there is enough room to cut – all that has to happen is that revenue matches spending. But scare tactics and wild rhetoric will surely define the debate, and it is likely the debt ceiling will be passed due to fear of government shutdown.

Finally, Pratt links to the survey of economists. I find it not surprising but still depressing that economists consider Krugman a star and don't even think of Hayek or Mises, that 60 some percent vote republican and 20 percent republican.

The Debt Limit and Stealth Taxes

“The weak economy and fresh tax cuts approved last month will help drive the federal budget deficit to nearly $1.5 trillion this year, the biggest budget gap in history and one of the largest as a share of the economy since World War II, congressional budget analysts said Wednesday.” See here.

This according to a Washington Post article. According to the media, it is not government spending causing the problem, it is the “fresh tax cuts.”


The tax cuts were not cuts, but rather extensions of existing tax rates. To argue that they are the cause of the deficits when spending has increased at historically high rates is ludicrous. But this is the left-wing or media viewpoint.

The big upcoming test of whether the current Congress is willing to bite the bullet and stop spending is raising the debt ceiling. At current rates of spending, the federal government will bump up against its debt limit as early as March. Treasury Secretary Timothy Geithner warns that it will be catastrophic if Congress doesn't increase Uncle Sam's credit limit. Is he correct? Since 1917, Congress has allowed the Treasury the discretion to issue new debt (i.e., borrow money from other agencies or individuals). Congress didn't want to completely give up its Constitutional requirement to control the purse strings, and so it set a cap on how much total debt the Treasury could owe at any given time. Currently the statutory debt ceiling is $14.294 trillion. As of January, the actual debt stood at slightly more than $14 trillion.

Geithner and other spokespeople for the executive branch argue that the world will end if Congress doesn't give them permission to run up more red ink. In particular, they claim that without the ability to borrow from new lenders, the Treasury won't be able to meet its existing obligations, including interest and principal payments on already-existing debt. The government will shut down. This is not true. If the debt ceiling is not increased, the Treasury can prioritize interest and debt payment to avoid a default and essentially put the government on a stringent pay-as-you-go basis.

Repudiating government debt eliminates future tax liabilities. To the extent that people correctly anticipate those future taxes, a reduction in them should increase the value of private assets (including human capital) over the long run by the same amount that the value of government securities falls. Thus, people will gain or lose depending how closely their wealth is associated with the State. If on the other hand, people underestimate their future tax liabilities, they suffer from a fiscal or "bond illusion" in which Treasury securities make them feel wealthier than they actually are. Debt repudiation will bring their expectations into closer alignment with reality, which should increase saving.

Raising the debt ceiling will not staunch default – just change the form of default. Default will occur either explicitly by reneging on payments, or implicitly by massive inflation — at some point anyway in the next decade or two. The increased debt will be monetized and the increased money supply will lead to inflation at some stage. This is the problem of fiat currency and with the Federal Reserve. They are stealth tax collectors. The danger of fiat currency is invisible to the public, professional investors, and political commentators. The collapse of the economy in 2008 permitted the Congress and Bush and then Obama Administrations to authorize an unprecedented quantity of government spending, which has been and will be funded in large part by trillions of freshly minted fiat currency. There can be no question that this is a seizure of wealth roughly equivalent to one year’s collection of income tax, yet there is more outcry over making a trivial increase in the topmost bracket from 35 percent to 39.6 percent.

So rather than allowing the stealth tax increases, I support not raising the debt limit and forcing Congress and the Administration to choose how to cut spending or raise taxes.