Repudiation Is an Option

Repudiation Is an Option
Thursday, July 28, 2011
by Paul Cwik

After much thought on this topic, I have decided that the best way to deal with the more than $14.3 trillion national debt is through partial repudiation. Why? It is not an easy story to tell without some context, but I will try my best to be clear.

Each year after my daughter's birthday in May, the family heads to the beach for a week of sun and sand. Of course one of the best ways to relax is by reading economics! (At least it is for me.) My choice this time was Murray Rothbard's A History of Money and Banking in the United States. I had just finished his four-volume Conceived in Liberty, which details the history of the colonial period through the Revolutionary War, so I thought that this would be a good complement. It was.

In Rothbard's History, there was a section that has stuck in my mind for the past several weeks. He detailed how, in the late 1830s and '40s, several states defaulted on their debt. (See pp. 102–3.) The upshot is that we do more damage to the economy by trying to pay off the debt.

When the government spends money, it necessarily distorts the economy. When the government buys good X, resources are drawn to the production of good X by the normal market process. The unseen aspect of this governmental action is that resources are drawn away from the production of good Y. In other words, if left alone, the market would produce more Y and less X. But the government distorts the economy; it places its thumb on one side of the scale, favoring one market player over another. Most often these political decisions make society worse off.

When government spends that money, the effects are immediate. However, this is only half of the story. The other half is centered on the source of that money. Government only has four ways by which to raise funds: taxes, borrowing, money creation, and the sale of assets.

Each of these is bad and further distorts the economy.

Government taxes are never market neutral. They always penalize one behavior and create an incentive to do something else. A sales tax penalizes spending and incentivizes savings. A gas tax penalizes driving and incentivizes telecommuting. An income tax penalizes earning an income and encourages slothfulness. And so on. Each tax imposed hinders the progress of the economy and ultimately reduces living standards. If we had to tax our way out of our national debt, we would have to tax almost 100 percent of GDP for a year. However, even this action would just barely get us out of today's hole. It does nothing for next year's budget deficit.

The second manner in which the government raises funds is through borrowing. It is impossible to borrow our way out of debt. It's like using a MasterCard to pay your Visa bill and then reversing it next month. Borrowing more is simply not an option.

The third method is money creation. The money that we use today is a fiat money, which is backed by nothing other than the "full faith and credit of the United States Government" (whatever that means). In other words, dollars are backed by nothing. When the Fed creates money, it pulls it out of a big, black hole of nothingness. Where did it come from? Nowhere. How much can it pull out? As much as it wants. There is an infinite supply available.

We could, if we wanted, pay off the national debt tomorrow. However, by doing so, $14.3 trillion dollars would be created and dumped into the economy. The dollar might suffer a slight problem of devaluation. (Yes, that was sarcasm. Prices would consequently skyrocket!) Furthermore, each newly created dollar has nonneutral effects that jam price signals, redistribute wealth to those with the new money, and sow the seeds of another business cycle. Since this approach is a de facto tax that is hidden from most people, this tends to be the method governments have historically chosen to get themselves out of their debt hole.

The fourth method government uses to raise money is the sale of assets. In the 19th century, the US government sold land in the American West and used that money to partially finance its activities. Today the US government has reversed its policy of selling assets and is instead acquiring land for various reasons (environmental, military, etc.). While selling assets has the most merit of the four in several aspects, it will not even be considered as a viable option because of this policy reversal. Furthermore, it just isn't big enough. A one-time sale cannot overcome a perpetual expenditure.

So that leaves us with a large dilemma. We have a government that cannot control its spending, and we have a national debt that cannot possibly be paid back without wrecking the economy. Even if we used a combination of tax increases, money creation, and asset sales, we wouldn't have enough to fix the mess. At each moment, there is only a finite amount of taxable wealth in the United States. If government extracts the wealth through money creation, it can't extract that same wealth with an additional tax.

The least harmful alternative is partial debt repudiation ­ in other words, defaulting on some of the debt. Think about what that means for a moment. (Really, take a moment and think about it.) We have spent so much that we cannot pay back our creditors. As I read in Rothbard's History, we have been in this position before. Here is how Rothbard reports Americans' reaction to public debt in the 1840s:

The British noted in wonder that the average American was far more concerned about his personal debts to other individuals and banks than about the debts of his state. In fact, the people were quite willing to have the states repudiate their debts outright. Demonstrating an astute perception of the reckless course the states had taken, the typical American response to the problem, "Suppose foreign capitalists did not lend any more to the states?" was the sharp retort, "Well who cares if they don't? We are now as a community heels over head in debt and can scarcely pay the interest." (p. 102)

The same can be said today. Should we really feel bad for those who have purchased government bonds? They are the ones who have been feeding the monstrously reckless actions of the government. When they get (partially) burned, will they be willing to finance more government debt? Of course not. Suppose the Chinese decide not to lend any more to the US government. Is this really so bad? The government would have to deal with its future overspending.

Fundamentally, there is the issue of justice. Some people loaned the government their money for a return. Why should they have assumed that there was zero risk? When I invest in any other venture, there is always default risk. Why should the creditor to the government get to live under different rules?

Furthermore, why should the average American be punished through higher taxes or a devalued currency for the politicians' inability to restrain spending? As Mises once pointed out, it is like hitting a pedestrian with your truck (the impact of the initial governmental spending) and then trying to undo the problem by putting the truck into reverse and running the guy over again. All to make it better! The economy was already distorted by the initial spending, and then the problem is compounded by funding the spending. Additionally, politicians spend these funds on projects designed to keep themselves in power. Even the programs wrapped in the cloak of magnanimity, like welfare and social security, are designed to make us dependent on the government and their reelection.

Rothbard's History demonstrates how the repudiations of the 1830s and '40s did not cause the sky to fall. In fact, the return to sound money coupled with a liberalization of the economy spurred a tremendous amount of growth. Rothbard explains:

It is evident, then, that the 1839–1843 [monetary] contraction was healthful for the economy in liquidating unsound investments, debts, and banks, including the pernicious Bank of the United States. But didn't the massive deflation have catastrophic effects ­ on production, trade, and employment, as we have been led to believe? In a fascinating analysis and comparison with the deflation of 1929–1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years (1839–1843 and 1929–1933) was almost the same. Yet the effects on real production of the two deflations were very different. Whereas in 1929–1933, real gross investment fell catastrophically by 91 percent, real consumption by 19 percent, and real GNP by 30 percent; in 1839–1843, investment fell by 23 percent, but real consumption increased by 21 percent and real GNP by 16 percent. (p. 103)

So how much should we repudiate? I don't know. The amount should be big enough to scare reality into the investors of US Treasuries (and hopefully politicians), but not too big that it wipes out the retirement funds of those looking for the "safe" investment. Perhaps the Treasury should declare that they will pay 80 cents on the dollar, but that just rolls the clock back a few years (back only to $11.4 trillion!).

The sad reality is that without fundamentally changing the way the government spends, there is no solution. The four largest expenditures made by the government are, from greatest to least, (1) Social Security, (2) Medicare and Medicaid, (3) defense, and (4) welfare. We can't really print our way out of the mess, because Social Security payments, etc., are indexed to the CPI. We can't grow our way out either, because they're also linked to growth rates.

So repudiation is not a complete solution. It is a part of an overall solution of (real) spending cuts, economic growth, and debt repudiation.

It is clear that we cannot continue on this path. Politicians are like water ­ they follow the path of least resistance. Politicians will try to avoid making a decision, and the longer they delay, the worse the problem becomes. The reality is that there are no more fixes to be done. We are out of financial gimmicks. The day of financial reckoning is upon us; maybe we can kick the can down the road another election or two, but be prepared for higher taxes, currency devaluation, and possibly debt repudiation.


Paul Cwik is associate professor of economics at Mount Olive College. See Paul Cwik's article archives.

http://mises.org/daily/5480/Repudiation-Is-an-Option

When Government Shuts Down

When Government Shuts Down
by Llewellyn H. Rockwell, Jr.
From The Free Market, December 1996.

According to official history, the 104th Congress doomed itself when it shut down the government to force its budget priorities on the president. People got up in arms and demanded that government be reopened. This taught the people and their representatives a valuable lesson. As much as we may complain, we truly need big government. Today, we all agree with the White House vow to never allow the government to shut down again.

Of course, everything about this story is nonsense. Shutting down the government was this Congress's most noble act. Though the freshmen, who forced the closing against the leadership's wishes, didn't properly prepare for the inevitable response from the media and the bureaucracy, they were on the right track. It may have been the only principled act in two years of political compromise.

Moreover, nobody has produced a shred of evidence that the government shutdown was as unpopular as the media claimed it was. It was asserted daily, but never proven. Oh sure, we heard about how people couldn't get passports, couldn't get into Yellowstone, couldn't see the Vermeer art exhibit at the National Gallery of Art. But what's most startling is that the central government – which consumes 40 percent of the national wealth – wasn't missed much at all.

There was a fiscal illusion at work. At issue was a budget authorization that entitled government to spend money before it was there to spend. But government could have reopened, and run based on present receipts. That way the budget would be immediately balanced. Everyone claims to want pay-as-you-go government, but nobody suggested this as an option. They acted as if debt finance is part of the natural law.

There is still more to learn about government during shutdowns. Consider what is known as the "Washington Monument Ploy." When budget cuts are threatened, visiting hours at popular monuments are cut back. A budget cut is voted by Congress, or an insufficient increase, and moments later an official-looking official asks the assembled tourists to please disperse. Thanks to those greedy Congressmen, we've been denied essential funds.

The media are there to record every word, and conduct interviews to be broadcast on national television. Average people tell the reporter, "my family and I came all the way from Sacramento, but because of political bickering, our vacation has been ruined," etc. The lesson is clear: Congress had better vote every dime the president demands or the People will strike back on prime time news. Sadly, this ploy works time and again.

Behind the scenes, the whole scenario has been orchestrated. There are very few things the federal government does that people directly benefit from. Among them are issuing passports, delivering the mail, running monuments and museums, and maintaining national parks. That's precisely why they take the hardest hit.

Now, in running the Washington Monument Ploy, the White House has to be careful not to cause it to backfire. For example, if the mail stopped being delivered, the public might revolt against the Post Office itself, and fuel demands that it be privatized. The trick is to shut down services that affect a minority conspicuously, in ways the media can dramatize, but not generate anger against government itself.

What's behind it all, of course, is the desire to keep the largess flowing, not to serve the public. If the feds wanted to serve the public, and Congress wasn't authorizing new spending, they could divert money from services people don't need ("Social Services for Refugees and Cuban/Haitian Entrants") to those they do need (passports). Even better, a truly beneficent leader would simply give away control of monuments and passport offices to private entities to run for profit.

Here's the irony. The services that people need most from government are the very ones that could easily be run privately. This follows by definition: if people want something, an entrepreneur is glad to make a profit providing it. On the other hand, the services people don't need shouldn't exist at all.

From a strategic standpoint, the government has the incentive to hold onto privatizable services like national parks because they are useful in times of government shutdown. It monopolizes some services just to keep the public from thinking they could get along without the government.

This is more than just a budget trick; it goes to the heart of nearly everything government does. Even at the local level, when budgets are cut, the first thing to get the axe are extended hours at the public library. Then the most popular periodicals themselves are canceled. Government, in its malice, gains more benefit from withholding useful services than providing them.

This is the very opposite of how private business operates. When a business has to cut costs, it looks for waste and inefficiencies, but it is loathe to cut consumer services. In fact, it might improve them if doing so is likely to bring in more revenue. Sticking it to the consumer would only create more losses and drive the company toward lower profitability.

With government sabotaging any attempt to cut its budget by cutting services people want, how can government budgets be successfully cut? There's no easy answer – ideally the person doing the cutting would have massive power over the bureaucracy – but here's the first step. All so-called essential government services should be privatized. That way government would no longer be seen as economically or socially essential.

Let's start with the Washington Monument. There's no excuse for not handing it over to a private company or association to run, just as Mount Vernon is run privately. Those who say it can't be done haven't noticed how many people visit that political temple every year.

But isn't this monument a public good that people should have full access to? Granted. That's why we need private enterprise, which always focuses on the public, to provide it. The same is true of the mails, national parks, passport offices, the Smithsonian, or any other good or service the government provides that people regard as necessary to their well being.

The advantage would be obvious. During the next government shut down – let's hope it comes soon and stays long – the bureaucracy would have fewer means of demonstrating that we really need them. They will be reduced to showing how awful it is that the Indian and Native American Employment and Training Program has been shut down.

All of this presumes that government has no other means to fund itself during emergencies. Unfortunately, that is not true. During the 1995 shutdown, Treasury head Robert Rubin conspired with other government-financial elites to run the government on money looted from civil-service pension accounts, although this is illegal.

Then the bureaucracy gave Congress a sock in the chops by forwarding unearned back pay to the entire government workforce. The whole shutdown ended up as a paid vacation for the most despised class in the country. If anything about the shutdown inspired public anger, it was this above all. Sadly, the opposition party took the blame, and then let bygones be bygones.

The lesson of the government shutdown is not that people want it to stay open, always and forever, but that the world doesn't fall apart when Uncle Sam takes the day off. Let's give him the next century or so, see how the people on their own can restore prosperity and liberty. With no taxes to pay, there'd be plenty left over to pay even exorbitant admission fees to the Washington Monument.

July 28, 2011

http://lewrockwell.com/rockwell/when-govt-shuts-down186.html

Ballpark Liturgy: America’s New Civic Religion

Ballpark Liturgy: America's New Civic Religion
Via TomDispatch comes this look at how pro sports play ball with the Pentagon.
By Andrew Bacevich | July 28, 2011

Fenway Park, Boston, July 4, 2011. On this warm summer day, the Red Sox will play the Toronto Blue Jays. First come pre-game festivities, especially tailored for the occasion. The ensuing spectacle ­ a carefully scripted encounter between the armed forces and society ­ expresses the distilled essence of present-day American patriotism. A masterpiece of contrived spontaneity, the event leaves spectators feeling good about their baseball team, about their military, and not least of all about themselves -- precisely as it was meant to do.

In this theatrical production, the Red Sox provide the stage, and the Pentagon the props. In military parlance, it is a joint operation. In front of a gigantic American flag draped over the left-field wall, an Air Force contingent, clad in blue, stands at attention. To carry a smaller version of the Stars and Stripes onto the playing field, the Navy provides a color guard in crisp summer whites. The United States Marine Corps kicks in with a choral ensemble that leads the singing of the national anthem. As the anthem's final notes sound, four U. S. Air Force F-15C Eagles scream overhead.  The sellout crowd roars its approval.

But there is more to come. "On this Independence Day," the voice of the Red Sox booms over the public address system, "we pay a debt of gratitude to the families whose sons and daughters are serving our country."  On this particular occasion the designated recipients of that gratitude are members of the Lydon family, hailing from Squantum, Massachusetts.  Young Bridget Lydon is a sailor ­ Aviation Ordnanceman Airman is her official title ­ serving aboard the carrier USS Ronald Reagan, currently deployed in support of the Afghanistan War, now in its 10th year.


From Out of Nowhere

The Lydons are Every Family, decked out for the Fourth. Garbed in random bits of Red Sox paraphernalia and Mardi Gras necklaces, they wear their shirts untucked and ball caps backwards. Neither sleek nor fancy, they are without pretension. Yet they exude good cheer. As they are ushered onto the field, their eagerness is palpable.  Like TV game show contestants, they know that this is their lucky day and they are keen to make the most of it.

As the Lydons gather near the pitcher's mound, the voice directs their attention to the 38-by-100-foot Jumbotron mounted above the centerfield bleachers.  On the screen, Bridget appears.  She is aboard ship, in duty uniform, posed below decks in front of an F/A-18 fighter jet.  Waiflike, but pert and confident, she looks directly into the camera, sending a "shout-out" to family and friends. She wishes she could join them at Fenway.

As if by magic, wish becomes fulfillment.  While the video clip is still running, Bridget herself, now in dress whites, emerges from behind the flag covering the leftfield wall. On the Jumbotron, in place of Bridget below decks, an image of Bridget marching smartly toward the infield appears. In the stands pandemonium erupts. After a moment of confusion, members of her family ­ surrounded by camera crews ­ rush to embrace their sailor, a reunion shared vicariously by the 38,000 fans in attendance along with many thousands more watching at home on the Red Sox television network.

Once the Lydons finish with hugs and kisses and the crowd settles down, Navy veteran Bridget (annual salary approximately $22,000) throws the ceremonial first pitch to aging Red Sox veteran Tim Wakefield (annual salary $2,000,000). More cheers. As a souvenir, Wakefield gives her the baseball along with his own hug. All smiles, Bridget and her family shout "Play Ball!" into a microphone. As they are escorted off the field and out of sight, the game begins.


Cheap Grace

What does this event signify?

For the Lydons, the day will no doubt long remain a happy memory. If they were to some degree manipulated ­ their utter and genuine astonishment at Bridget's seemingly miraculous appearance lending the occasion its emotional punch ­ they played their allotted roles without complaint and with considerable élan. However briefly, they stood in the spotlight, quasi-celebrities, all eyes trained on them, a contemporary version of the American dream fulfilled. And if offstage puppet-masters used Bridget herself, at least she got a visit home and a few days off -- no doubt a welcome break.

Yet this feel-good story was political as well as personal. As a collaboration between two well-heeled but image-conscious institutions, the Lydon reunion represented a small but not inconsequential public relations triumph. The Red Sox and the Navy had worked together to perform an act of kindness for a sailor and her loved ones. Both organizations came away looking good, not only because the event itself was so deftly executed, but because it showed that the large for-profit professional sports team and the even larger military bureaucracy both care about ordinary people. The message conveyed to fans/taxpayers could not be clearer: the corporate executives who run the Red Sox have a heart. So, too, do the admirals who run the Navy.

Better still, these benefits accrued at essentially no cost to the sponsors. The military personnel arrayed around Fenway showed up because they were told to do so. They are already "paid for," as are the F-15s, the pilots who fly them, and the ground crews that service them. As for whatever outlays the Red Sox may have made, they are trivial and easily absorbed. For the 2011 season, the average price of a ticket at Fenway Park had climbed to $52. A soft drink in a commemorative plastic cup runs you $5.50 and a beer $8. Then there is the television ad revenue, all contributing the previous year to corporate profits exceeding $58 million. A decade of war culminating in the worst economic crisis since the Great Depression hasn't done much good for the country but it has been strangely good for the Red Sox ­ and a no-less well funded Pentagon. Any money expended in bringing Bridget to Fenway and entertaining the Lydons had to be the baseball/military equivalent of pocket change.

And the holiday festivities at Fenway had another significance as well, one that extended beyond burnishing institutional reputations and boosting bottom lines. Here was America's civic religion made manifest.

In recent decades, an injunction to "support the troops" has emerged as a central tenet of that religion.  Since 9/11 this imperative has become, if anything, even more binding. Indeed, as citizens, Americans today acknowledge no higher obligation.

Fulfilling that obligation has posed a challenge, however. Rather than doing so concretely, Americans -- with a few honorable exceptions -- have settled for symbolism. With their pronounced aversion to collective service and sacrifice (an inclination indulged by leaders of both political parties), Americans resist any definition of civic duty that threatens to crimp lifestyles.

To stand in solidarity with those on whom the burden of service and sacrifice falls is about as far as they will go.  Expressions of solidarity affirm that the existing relationship between soldiers and society is consistent with democratic practice. By extension, so, too, is the distribution of prerogatives and responsibilities entailed by that relationship: a few fight, the rest applaud. Put simply, the message that citizens wish to convey to their soldiers is this: although choosing not to be with you, we are still for you (so long as being for you entails nothing on our part). Cheering for the troops, in effect, provides a convenient mechanism for voiding obligation and easing guilty consciences. 

In ways far more satisfying than displaying banners or bumper stickers, the Fenway Park Independence Day event provided a made-to-order opportunity for conscience easing. It did so in three ways. First, it brought members of Red Sox Nation into close proximity (even if not direct contact) with living, breathing members of the armed forces, figuratively closing any gap between the two. (In New England, where few active duty military installations remain, such encounters are increasingly infrequent.) Second, it manufactured one excuse after another to whistle and shout, whoop and holler, thereby allowing the assembled multitudes to express -- and to be seen expressing -- their affection and respect for the troops. Finally, it rewarded participants and witnesses alike with a sense of validation, the reunion of Bridget and her family, even if temporary, serving as a proxy for a much larger, if imaginary, reconciliation of the American military and the American people. That debt? Mark it paid in full.

The late German theologian Dietrich Bonhoeffer had a name for this unearned self-forgiveness and undeserved self-regard. He called it cheap grace. Were he alive today, Bonhoeffer might suggest that a taste for cheap grace, compounded by an appetite for false freedom, is leading Americans down the road to perdition.


Andrew J. Bacevich, the author of Washington Rules: America's Path to Permanent War, is professor of history and international relations at Boston University. His next book, of which this post is a small part, will assess the impact of a decade of war on American society and the United States military. To listen to Timothy MacBain's latest TomCast audio interview in which Bacevich discusses cheap grace and military spectacle, click here, or download it to your iPod here.

http://www.amconmag.com/blog/ballpark-liturgy-americas-new-civic-religion/

Shut Down the Postal Service

Wednesday, July 27, 2011
Shut Down the Postal Service
by Jacob G. Hornberger

The Postal Service has announced that it is closing 3,700 post offices across the country due to financial troubles.

I've got a better idea. How about closing the Postal Service itself and turning over the delivery of first-class mail entirely to the private sector?

After all, the Postal Service is a monopoly. That means the government has granted it an exclusive privilege to deliver first-class mail without fear of competition. Why should we have monopolies in a country that purports to be based on principles of free enterprise?

What happens if a private-sector business tries to compete against this monopolist? Postal Service officials immediately run to their nearest U.S. Attorney's office to complain. Some assistant U.S. Attorney then immediately runs to a federal judge, who immediately enters an injunction against the private-sector malefactor, requiring him to shut down his competitive effort.

That's how a monopoly works. The monopolist gets all the business and uses the force of government to shut down competitors.

Throughout history, people have been besieged by monopolies. And they've hated them. Knowing that they don't have to worry about competition, products and services provided by monopolies are always substandard and shoddy. And customers are made to feel like servants rather than as sovereigns.

What happens if a customer dislikes the service provided by some post office? He can't switch his business to a competitor because, again, competitors are not allowed. All he can do is switch his business to another branch of the postal monopoly. Big deal. It's the same organization.

What about people in the mountains? How would they get their mail if the Postal Service is dismantled and the postal monopoly repealed? Perhaps in the same way they get their milk and bread. When one decides to live in the mountains, there are costs associated with that decision. No one has a right to have mail delivered to his house any more than he has a right to have milk and bread delivered to his house.

The free market produces the best of everything, while government enterprises and government-granted monopolies produce the worst of everything. In a free market, the consumer is king and competitors must constantly seek to serve him better in order to keep his business. With government businesses and monopolies, the provider doesn't have to worry about losing anyone's business to competitors.

Monopolies have no business in American life. Our heritage is economic liberty, private property, free markets, free enterprise, competition, and consumer sovereignty.

Let's not limit the Postal Service's closures to 3,700 post offices. Let's shut down the whole thing, repeal the postal monopoly, and let freedom reign.

http://www.fff.org/blog/jghblog2011-07-28.asp

The Scam of the Budget Talks

July28th
The Scam of the Budget Talks
Tom Woods

Writes Jeff Deist:

Federal revenues…were about $2.1T in FY10, and they appear on track to be about the same for FY11.  So assuming fedgov collects the same $2.1T in FY12, Congress simply needs to adopt the 2003 budget.  That's it.  That's all it takes to balance the budget in 2012.

Yet our Republican and Democrat friends want to take 10 years, or even 30 years, to accomplish this.

Was the federal government really too small just 8 years ago, in 2003?

Of course a balanced budget is no lofty goal.  The real focus should be total spending by government.