Economic Wisdom for the End of 2012

 Some lessons we never learn, no matter how educated we might be and how many academic credentials we acquire.

It was years ago when I first encountered the first and most important reality of economic understanding.  It was in Heinlein’s book The Moon is a Harsh Mistress where he used the phrase “There aint no such thing as a free lunch” to illustrate the fact that everything must, in the end, be paid for by someone.  In another iteration of the same idea British Prime Minister Margaret Thatcher famously said, “sooner or later you run out of other people’s money.”  Intelligent people, working with common sense cannot contest the above statements yet, it seems that a large number of people do, every day.  Governments especially seem bent on doing so until they reach a “day of reckoning” and have to confront reality, as Greece is doing now.  Others, at least so far, are content to “kick the can down the road” in the hope that they will be dead and gone when the crisis becomes unavoidable. 

 

The approach that these governments are taking today reminds one of Hannah Arendt’s criticism of the Sophists in The Origins of Totalitarianism.  As Arendt stated it:

 

[T]he ancients were satisfied with a passing victory of the argument at the expense of truth, whereas the moderns want a more lasting victory at the expense of reality.

 

Arendt may not have intended it at the time but this criticism applies so profoundly to many modern governments in that they refuse to recognize reality when it is staring them in the face; they prefer to pursue political goals instead of doing what is supposed to be their number one priority; taking proper care of the nation they are supposed to be governing. 

 

Take our present situation in the United States.  The White House continually postures about how we need to raise taxes to deal with the national debt, but refuses to cut spending and ignores the fact that the increased tax rates will raise only a tiny fraction of the money needed to make a dent in the annual deficit.  It is, in Arendt’s words, an attempt to create a political victory at the expense of the reality that spending controls are the only thing that will solve the problem in the long run.  And these statements are being made by an administration whose leader promised to “go over the budget line by line” but who is too busy schmoozing with entertainers to do so. 

 

The plain fact is that economics is a matter of common sense.  It is the same common sense that a businessperson uses to create a budget.  It is the common sense that says that you can’t spend money you don’t have forever without consequences; to do otherwise flies in the face of reality.  Of course, government officials are rarely interested in reality.  Instead they pursue their personal interests, which often consist of getting re-elected.  And in today’s political scene getting re-elected generally means promising of free stuff to the voters.  What the voters don’t seem to understand (go back to paragraph one) or perhaps don’t want to understand is that someone must pay for the “free stuff” sooner or later. 

 

As a former tax and bankruptcy attorney this lesson was one that I often had to hammer home to some clients.  When they couldn’t pay their bills someone else had to pick up the cost of what they didn’t pay for.  A merchant who wasn’t paid had to pass the cost of the bad debt on to other customers if possible, or reduce the amount of money that the owner could take home.  The vast majority of bankruptcy clients I encountered were people who had overcommitted themselves and were caught when the dotcom bubble collapsed.  It is a reasonable statement that they were victims of their own bad planning, compounded by circumstances beyond their control.  But government officials who are expected to have the best information available at their beck and call should be above this type of problem.  It is only their failure to recognize and use that information that prevents them from solving the economic issues that the nation faces. 

 

What many people fail to recognize is the widespread fault that exists throughout the national government.  One criticism that is all to frequently ignored is that George W. Bush was a big spender whose backing of “no child left behind” and Medicare part D were even more dangerous to the nation’s economic health than foreign military activities.  Most Republican budget hawks have only recently developed an interest in cutting spending and that has happened under pressure from grass roots / Tea Party activists.  Left to their own devices they would likely continue spending as before, only not as much as their opposition. 

 

What characterizes the Democrat approach to government spending today is the belief that there is no such thing as too much government spending, and the only way to prosperity is to raise taxes as high as possible while spending ten or even one hundred times that amount each year.  How they plan to avoid disaster while doing this is never mentioned.

 

Some years ago I encountered an excellent book entitled The Death of Common Sense by Philip K. Howard.  Howard’s work was not only applicable to the time it was written, but was prophetic as well, as what little common sense existed then existed in the population at large appears to have disappeared totally from so many people as to make the nation no longer viable.  The desire to learn or to apply knowledge appears to have also disappeared as well. 

 

After taking a series of college and graduate level economics courses years ago I became convinced that the material in those courses that the average person needed to understand could be taught in about five or six hours.  The rest was largely applied mathematics, which was useful, but not necessary for anyone who wanted to keep their personal finances in order or wanted to know why a government can go bankrupt.  Ben Bernanke’s credentials, while wonderful to look at, didn’t make any difference to his ability to deal with the nation’s finances.  Instead of playing the role of statist stooge he could serve the nation better by simply coming out and stating simply that the nation is heading for bankruptcy if it doesn’t cut spending and the sooner the better.  If he threw in the fact that increased taxation won’t help, his comments would be even more useful.  It might even shock the people in charge into doing something.  I’m not holding my breath waiting for him to do it. 

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