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Category — Federal Debt Crisis

Exhausting the Reserve Fund: The Big Picture of the Limits to Big Government (Part II)

Editor Note: Dr. Ebeling’s two-part post (Part I yesterday) provides the necessary background to understand how debt reduction is driving energy policy. Regarding the budget fight, E&E News (see Appendix) reported yesterday: “As the proverbial eleventh hour looms for the nation’s maxed-out debt limit, this week brings energy-policy battles of all sizes — from how to divide offshore-drilling revenue to the lessons gleaned from recent oil spills — that will play out amid the larger fiscal showdown.”

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“Austria was successful in pushing through policies that are popular all over the world. Austria has the most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits [monetary expansion], she increased consumption. After all these achievements she was on the verge of ruin.”

- Fritz Machlup, “The Consumption of Capital in Austria,” Review of Economic Statistics (January 15, 1935), pp. 13-19 at 19.

U.S. spending and the accumulated deft load is more than the economy can bear. What is collected in both personal and corporate taxes is not enough to cover all that the government spends because government’s promises to an ever-expanding spider’s web of special interest groups vastly exceeds what the country can afford to pay out of currently earned income. If the government attempted to raise that additional 40 cents out of every dollar it presently spends through borrowing by raising taxes, it would bring the economy to a screeching halt.

It would soon be discovered that “soaking the rich” even more would barely provide a handful of drops to cover the spending in excess of taxes collected. It would have to be admitted that the only source of additional government revenue to fill the deficit gap would be significantly higher taxes on the broad middle class of income earners, as well as adding to the tax rolls many of those currently paying no taxes.

Income earners would save even less than now; incentives and resource ability for private sector investment in new or existing businesses in the U.S. would be crushed – along with any market- based job creation. The capital for research and technological development would dry up even more in America, and capital that could get away would flee to more business-friendly countries.

Nor can the borrowing binge continue for very much longer. Net interest payments on U.S. government debt presently equals about 1.3 percent of GDP. Under current borrowing projections, with no change in planned government spending, by 2020 interest payments on the government debt would nearly double to 3.2 percent of GDP. Between 2011 and 2020, this would mean that the United States government would have to pay a total of $4.8 trillion in interest payments.

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July 19, 2011   1 Comment

Exhausting the Reserve Fund: The Big Picture of the Limits to Big Government (Part I)

[Editor Note: Obama's transformationist energy policy, enabled by taxpayer largesse, is being whipsawed by the federal deficit crisis. And the energy/environmental statists are running scared. "[Obama] has bought into and reinforced the GOP narrative that debt and spending concerns reign supreme,’ lamented Joe Romm at Climate Progress, “which will undermine short-term and long-term efforts to create jobs or promote clean energy or reduce oil dependence or cut carbon pollution.”

Today and tomorrow, economist Richard Ebeling outlines the macro crisis. On Wednesday, Lisa Linowes of Wind Action makes a case for ending all energy subsidies as a contribution toward fiscal reform.]

The economic crisis through which the United States and much of the rest of the world are now passing is not another supposed instance of the “failure” of unrestrained capitalism. It is the failure of the government’s own policies. In other words, it is a crisis of the Interventionist State.

The recession has been the inevitable outcome of the prior artificial investment boom and housing bubble, which were caused by the misguided and highly expansionary monetary policy of the Federal Reserve between 2003 and 2008. The money supply was increased by nearly 50 percent during this five-year period, and key interest rates, when adjusted for inflation, were at or below zero. Investment and housing decisions were radically out of balance with available real savings to sustain such long-term financial commitments. Consumers and homeowners were induced by low interest rates and easy mortgage policies to get in way over their heads.

The duration and slowness of the recovery, and especially the sluggish delay in anything approaching “full employment,” is also the consequence of the government’s policies. The Federal Reserve went on another massive monetary expansionist binge that has increased the money supply in the form of additional bank reserves by well over $2 trillion in just a less than three years. Interest rates have, again, been kept at or even below zero when adjusted for inflation, with the affect of continued highly distorted investment and housing sectors.

Fiscal Folly, Burdensome Government [Read more →]

July 18, 2011   2 Comments