July 23, 2011

Saturday Learning Series - Basic Economics (continued)

Last week, I started with some background by Professor Engelhardt on basic economics.  This week continues with the bonus of some special topics - Keynes, debt and a look at this week's debt crisis from a rational perspective.

Part 5: On Money

Special Topic: On Keynesian Economics

Special Topic: Why Debt Matters (a view from 2 years ago)

And a thought from Professor Englehardt on the current debt crisis (read the whole thing here);
I have to confess: I'm a fan of balanced budgets. In fact, I'm even a fan of the government having a balanced budget amendment. It just strikes me as more honest for a simple reason: every dollar the government spends is "backed" by taxes - either current revenues, future revenues, or inflationary seignorage (from the government basically printing money to pay expenses). In a world without a balanced budget amendment, we can discuss taxes and spending as two separate things. The problem, of course, is that this is nonsense, and dangerous nonsense at that. "So, do we want to spend money on Medicare?" "Of course! People NEED that!" "Do we want to increase taxes on yachts?" "Of course not! That would kill the yacht industry!" So, we end up with "deficit bias". Spending is an easy political sell. Taxes are not. So, since the business of politics is to do what is easy and popular, we end up with spending so much money that between 30 and 40 cents of every dollar spent by the federal government is borrowed...

Government debt, however, is different. It is largely dishonest. The reason it's dishonest: (1) there does not appear to be any reasonable expectation of the government's debt being paid back. If there were, we wouldn't be having debates about a debt ceiling right now, because debt wouldn't have accumulated to the level it has. (2) Generally, the government debt IS passed on to the next generation. That being the case, deficit spending is actually just forcing our children/grandchildren/etc. to pay for something that we weren't willing to. I can think of no way to frame that as something a "good, honest person" would do. Forcing someone else to pay your expenses is somewhere in the categories of theft, embezzlement, and fraud.

...even if the federal government taxed away every penny of profit from corporations, it still wouldn't close the deficit.

What about taxing the rich? Well, in 2010, the top 1% of earners earned about $1.7 trillion. So, yes, they could pay for the deficit - if you taxed them at a 76% rate. What would that do, exactly? Well, the cutoff for that group is just under $400,000. So, these people would see their after (federal) tax income sitting at around $100,000 - obviously, a significant drop.

And that's another problem. People tend to try to avoid taxes.
He sounds positively Austrian in his economics (although he claims in one of the videos above to not be perfectly aligned with them). He also sounds absolutely right about deficits and government debt.

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