Governments’ attempts to spend and print their way out of bad times produce disastrous results and ignore the lessons of history.
Our government’s long-term reckless spending and taxing policies—implicitly or explicitly backed by most members of Congress—impoverish Americans. They also psychologically cripple them as they think only the government can save them.
Congressional leaders, many of whom have already voted for several stimulus packages, debate more of the same as a way of avoiding an impending depression.
“We must think big for the people now,” said U.S. House of Representatives Speaker Nancy Pelosi. “Not acting is the most expensive course,” speaking of her $3 trillion dollar legislation.
The package includes more spending on almost everything. It was approved by the House with little review.
The leaders of the Republican Senate said the House bill was “dead on arrival.” However, the Republican opposition is not philosophical; it is political.
The GOP, which already helped pass several stimulus bills, has its own new package. It’s not as big as the Pelosi plan, but it is the same idea: Only more government spending solves the economic problem and forget about the dangers of long-term debt. Often these policies are accompanied by tax hikes.
These policies, which ignore the lessons of American economic history, also lead to a question: Who will pay?
Bigger Debts
These spending bills add enormous costs to an already bulging debt. But pump priming is exactly what was advocated by the most influential and destructive economist of the 20th century, John Maynard Keynes. Governments, he wrote, should spend to keep the economy booming. This ignores the dangers of bubbles, resulting crashes and of the seemingly endless justification of more government spending.
This philosophy means that the already red ink plagued America expands deficit spending and debts. Before this crisis started, America’s debt was “officially” $24 trillion.” This is a dubious number. The government doesn’t impose the standards of the GAAP (The Generally Accepted Accounting Standards) that it requires of private firms.
What is the true debt?
“That is a good question,” says Garrett Watson, a senior analyst, with the Mercatus Center at George Mason University. He says the debatable issue is whether to count all the future promises governments have made over decades for programs such as Social Security and Medicare.
The debt of the United States topped $26 trillion for the first time, according to a June report of the United States Treasury Department, but it has gone up more since then. It also said the debt had topped $24 trillion only two months before.
But there are many who question these official numbers and say they are much worse. People debate how deep is the debt. Some skeptical observers, such as economist Laurence Kotlikoff, argue the government numbers are fraudulent. Overissue of paper money has happened in many countries, including ours.
Red Ink Woes
The current overspending didn’t begin with Covid; it has been hanging over Americans for decades. Ten years ago, the official debt number was $13.4 trillion, according to the Congressional Budget Office (CBO). Back then many were speculating that the actual figure was much, much higher.
“The government is lying about the amount of debt,” Kotlikoff says.
Why does this reckless approach to the nation’s economic health go on and on, despite occasional calls from those out of power to end it?
Politics.
It is the desire of career politicians, of both parties, to get elected and re-elected. Spending and more spending are often viewed as the elixir that wins elections.
History Proves Almost Every Pol Likes to Spend Your Money
The spend without any limits policy appeals to politicians of all stripes.
However, more commonly, overspending has been part of politics as usual in good times and bad. Spend lots of money, especially around election time. Forget the long-term effects. This is a strategy that has been tried before. It seems to succeed in the short term. It creates a Potemkin Village effect.
The problem is in the long term the economy blows up even though in the short term it can win elections. Richard Nixon, just before the presidential election of 1972, went on a spending and money creation spree along with the Democratic Congress. He pressured his appointee to the Federal Reserve, chairman Arthur Burns, to follow an easy money policy. He also adopted a destructive wage and price controls.
Nixon, previously a conservative, even said that “now I am a Keynesian in economics.” In a 1970s stimulus policy, the government sent out higher Social Security checks just before Nixon’s re-election in 1972.
Many Democrats in Congress, most of whom were also re-elected that year, supported “Nixonomics.” But they argued with Nixon over who should have received credit for bigger government payments.
Sound familiar?
Today Democrats in Congress and President Trump trade charges on who deserves credit for our paltry $1,200 stimulus checks.
Back in 1972 they also argued. They traded charges on which party deserved credit for the bigger Social Security payments delivered to recipients just before they voted. Politically the policy worked. Economically it blew up.
Both Nixon and the Democratic Congress we re-elected. But it later led to a terrible period of stagflation, which included double digit inflation and 20 percent interest rates.
Stagflation lasted a decade. It destroyed millions of businesses and caused incalculable pain. It wiped out millions of jobs (I lost a reporter’s job at a Newton, New Jersey publication called “The Sussex Spectator”).
Back to the Future
Today, the big spending ways of our politicians are, once again, endangering the economy.
A recent Government Accountability Office (GAO) report, in effect, blames both parties. It notes debt has gone from some $5 trillion to $24 trillion over the last 25 years. This was a time of both Republican and Democratic presidents and Republican and Democratic Congresses.
But the always spend more idea, whether under Obama or Trump, is starting to have a long-term destructive effect as government reports document.
These debts and deficits are “unsustainable.”
That is the assessment of “The Nation’s Fiscal Health,” a GAO report. It was prepared just before trillions of dollars in new stimulus money were authorized by almost all Republicans and Democratic lawmakers in Congress as well as President Trump. The report warns these spending levels can’t continue because of entitlement spending promises.
“While spending on Social Security already exceeds $1 trillion per year, health care and net interest are expected to grow faster than GDP and be key drivers of federal spending in the future. Medicare spending is projected to reach $1 trillion per year by 2026, and net interest is projected to hit this milestone by 2032,” according to the GAO.
Today, we not only have unprecedented levels of red ink, but there is a greater danger: A huge part of it will end up paying for nothing; just interest on the debt. It will leave the nation with a perpetual debt that compounds forever.
“Over the past 50 years, net interest costs have averaged 2 percent of GDP but these costs are projected to increase to 7.2 percent by 2049, when they become the largest category of spending,” according to the GAO.
Reckless Spending
If the nation continues this, it will have the same problem as millions of Americans who mismanage credit cards. They face perpetual debt. They can only afford to pay interest on cards monthly. If interest suddenly spiked, they’re in trouble as would the United States government when it must refinance its debt.
The credit card industry has a term for these beloved customers. It is “revolvers.” They are those cardholders who have revolving credit lines. They pay interest each month to the delighted card companies. They love them because revolver business seemingly never ends, like U.S. government red ink.
The United States, due to its huge welfare/warfare state philosophy, is a nation whose government is a giant revolver. It can never retire its debt or eventually significantly reduce since it always has deficits even when the economy is booming.
This collective red ink—the deficit of each year added to the permanent debt—is destroying the nation, according to the GAO.
The policy is indebting the nation for generations but there’s another way: Study history.
The Better Way
Just about a century ago, as the Spanish Influenza outbreak was still raging, the United States was also in a depression. Few people know about the depression because it was a long time ago and because it only lasted some 18 months.
Why only 18 months?
The government didn’t try to spend its way out of its problems.
At the conclusion of World War I, officials found themselves in a bleak position.
The federal debt had exploded because of wartime expenditures. Annual consumer price inflation rates had increased more than 20 percent by the end of the war. The unemployment rate peaked at 11.7 percent in 1921.The new president, Warren Harding, promised to restore the traditional laissez-faire philosophy.
How had America arrived at the depression of 1920? Today’s leaders might consider these words.
“Business was depressed. For months following the Armistice we had persisted in a course of much extravagance and reckless buying. Wages had been paid out that had not been earned. The whole country, from the national government down had been living on borrowed money,” wrote Calvin Coolidge, Harding’s taciturn vice president.
Coolidge credited a regime of spending and tax cuts for turning the economy.
In 1920, unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. Secretary of Commerce Herbert Hoover—later falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of government interventions to turn the economy around. These were policies Nancy Pelosi mand most of our ruling pols would have endorsed.
Hoover was ignored. However, he would use these big spending methods in the Great Depression as president as would his successor, FDR, but on a greater scale. Both also raised taxes and both failed to restore prosperity.
Harding, whose administration later was caught up in the Teapot Dome scandal, laid out a series of laissez faire principles at the outset of his administration that worked.
“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity,” Harding said in 1920.
“We promise that relief which will attend the halting of waste and extravagance,” he continued, “and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.”
Harding also warned that “needless spending and heedless extravagance have marked every decay in the history of nations.”
The depression of 1920-21 would be the last one in which primarily laissez-faire methods would be used to restore the economy.
In 1921, there was no massive Keynesian stimulus spending. Instead of “fiscal stimulus,” Harding cut government spending between 1920 and 1922. Tax rates were slashed for all income groups.
The national debt was reduced by one-third. More importantly, markets were allowed to operate. Wages and price drops took place as the market corrected itself, principles outlined in economist Joseph Schumpeter’s book “Business Cycles.”.
Harding was aided by a Treasury Secretary who was also followed the old-fashioned policies, Andrew Mellon. His book, “Taxation; The Peoples Business,” is jammed with commonsense. He contended government should be run on business principles.
Mellon’s Different Approach
Mellon warned high taxes not only hurt the rich, but the poor as well because taxes embedded in items drive the cost of living for everyone. High tax rates tend to produce higher prices for the everyday items. They are also counterproductive for the government. That’s because, Mellon wrote, higher rates are counterproductive.
Mellon also warned that higher rates often generate less, not more, tax revenue. This was proven again some 70 years later when President Clinton’s cut in capital gains taxes produced a boom for the government.
Federal taxation, Mellon argued, shouldn’t be raised in bad times. It “should be the least burden to the people” and “yielding the most revenue to the government.” The way to do the latter was through low taxes.
For instance, he contended that high capital gains taxes, estate and gift taxes hurt the government.
The result of the Mellon/Harding Coolidge approach? In a year and a half, the economy was booming.
Austrian economist Murray Rothbard, in “America’s Great Depression,” says the Harding government did tinker with the economy through monetary policy; the easing of interest rates. However, Rothbard also noted that wage rates were “permitted to fall, and government expenditure and taxes were reduced.”
Under the older, now largely forgotten, view which had been the standard many times before in recovering from depressions, the government should keep taxation and spending low. It should reduce the public debt. It worked about a century ago.
Unemployment dropped to 6.7 percent by 1922, and was down to 2.4 percent by 1923. Less government, allowing for a natural recovery, worked.
“In 1920-21,” economist Benjamin Anderson writes, “we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. By the spring of 1923 we had reached new highs in industrial production and we had labor shortages.”
The 1920s, until the crash of 1929 that was caused by the recklessness of the Fed, were a boom period after the initial depression.
So which approach is it to be?
Keynes/Nixon and Pelosi or Mellon/Harding and Coolidge?
