Funding the Deficit

The proposed budget of the new crowd in Washington calls for deficit spending in huge amounts for years to come.  The lowest level of those deficits is over 400 billion and shows increases in the out years, climbing all the way to over 700 billion in ten years.  A deficit of over 400 billion would be huge headlines anytime.  Here we are contemplating deficits of much greater size without any end in sight or any coherent game plan to rein them.   I know about the current economic crisis and the need for some action or inaction to get our economy moving again.   Motion however does not equate to progress.   These numbers are without even considering the need to stem the increases coming for Medicare and Social Securityd benefits.  There is more blather in Washington about working on those matters but we have heard this story before.  Excuse me if I think it is the little boy crying wolf again.  We last did a major overhaul of Social Security about 25 years ago and that was after more than a decade of dithering and delaying the political pain of dealing with the problem. 

We will be spending lots more money than we will be collecting.  Firstly, tax revenues will drop in the immediate future because the economy has weakened and personal and business incomes will be lower and thus the tax revenues.  That can’t be denied; only the amount and duration of the revenue loss can’t be speculated.  The new budget also calls for increases in taxes.  People generally don’t like to pay taxes especially if they don’t believe them to be fair or that their use is for purposes that they don’t support.   With these increases now looming on the horizon and coming closer with each passing day people will start making plans on how to lower their taxable income.  The changes in the deductible items will also dramatically affect how people spend their money.   The fellow who could maybe make 265,000 a year might take a hard look at the numbers and decide he is better off making only 230,000  because the bulk of the extra income goes to the IRS.   I remember when  the rates were so high before Reagan and I did the same thing every year.  I looked for every conceivable deduction and spread my income over the years at every opportunity to reduce my tax rate.  Millions will be doing the same thing now.   Sadly, all the special interest groups and lobbyists will be beating the walls down in Congress looking for deductions or exemptions for all those groups, industries or unions.   You see it has already started with the charities.  It will only accelerate.  

As an aside I have often thought that we would be more willing to pay our taxes if we were allowed to designate the use of the money on our tax return.   Just like they have designated gifts to Churches and charities where the donor can specify how the money will be used.  It has to be used for that purpose and no other.  Some folks will give money to their church for the music department.  That money can only be used there.  Be interesting to see how the money would be allocated if the Government provided a form on the back of the tax return with all the Government departments and their numerous agencies listed there so you could allocate percentages for each one or none at all.  I wonder how much would be allocated for HUD for example or snail darter research in the EPA.  Would the EPA get enough to function?  What exactly does the Commerce department do that makes your life better?  By the way it employs 65,000 government workers doing whatever the hell it is they do all day long.  Yes, I know they do the census.  Do they need 65,000 full time for that chore once every ten years.  They hire a couple million extra for that anyway.

These deficits will be funded by issuing more Treasury notes and bonds.  So far we  have buyers because the rest of the world is also facing difficulty.  That won’t last forever and the worlds’ governments probably won’t run deficit spending forever like we are projecting.  Not to worry we are told because if there is not enough demand then the Federal Reserve will buy the notes when foreign demand wanes.  It will wane at some point or else the interest rates will soar on those notes and that will make the deficits even worse, much worse with the increased interest cost.  You should note that the so-called bell weather 10 year Treasury notes have already soared to 2.88% from  2.07% in the last 2 months.  That is a huge leap in that time frame.  Those notes are normally a sleepy backwater in the financial markets and moves are normally a few basis points in a week at most.   That move is a harbinger of things to come.  Yes, something wicked this way comes.  When the Fed buys the Treasury notes it does so by printing up the money and it is the most blatant of fraudulent dealings imaginable.  I mean can you loan yourself money?  Wouldn’t it be nice to loan yourself a million dollars and put that on your balance sheet as a real asset?  It is not real and that is the problem.  Printing press money only dilutes the value of the dollar.  Sure the dollar is ok right now and even moving up against some currencies but that is due to weakness around the world not because of great confidence in the dollar as a resevoir of value.  It is higher now only by comparison and again that condition will not prevail for as long as the deficits are projected to extend.  Those Treasury notes bought by the Fed will only stoke the flames of inflation and I worry that the Dems will return us to those glorious days of Carter all over again.  We’ve seen this movie before. It is “stagflation”.  High tax rates, very high inflation, shortages of essential commodities and a floundering economy and high unemployment.  Inflation plus the unemployement rate was called the “misery index”.  Never forget it is people with more money than you that hire you as an employee or give your small business a contract for work.   I promise you will never work for someone poorer than you.  

If the budget is passed as is and the future budgets in the near term and so many programs become entitlements that weren’t before, we face a difficult and sagging, limping economy for years to come.   There will be an economy.  Just nothing that will make you happy.  It is not morning in America right now but a long evening we face unless our course is changed.   We better change it.   We’ve let the inmates take over the institution.  It is crazy enough with sensible people running the place.

This is the week that Texas celebrates its declaration of independence from Mexico and the Alamo fell.  That band of about 185 men indeed became immortal with their stand.  It matches the heroics of the Spartans at Thermopilae and is a story known literally by peoples around the world. 

“The ancient insanity of governments: the mania of wishing to govern too much”.  Robespierre.   We need to listen to that butcher.  Even a villain can have a good thought.


1 Comment

Filed under Economics, government, Politics

One response to “Funding the Deficit

  1. Adam

    I love the idea about telling the government how to spend your tax return. I had never thought of it that way. Simple and genius. Just have a form you fill out with check boxes next to each department or certain government project. That would really tell everyone in DC what the masses want and don’t want, instead of the talking heads in DC telling us what we want. Is it better democracy to vote for who you want to represent you in DC or is it better to just tell DC how to spend your taxes? I think the later is much better…that way politicians are less important.

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