Common-Sense Economics

Greetings from the Left Coast!

I’m going to walk through this as slowly and simply as I can: In your own family, you cannot indefinitely spend more money than you take in. Your savings will be exhausted, you will fall deeper and deeper into debt, and you will eventually reach the point where no one is willing to lend you any more money. When you reach that point, you have three choices: (1) Reduce your expenditures to a level that is low enough that you can at least break even, if not begin paying back some of your debt; (2) Increase your income somehow…although that only helps if you don’t increase your expenditures by the same amount; (3) Go broke.

How might those principles apply to a nation – say, the United States? First of all, we have increased our deficit spending to an amount that staggers the imagination. This year’s deficit will be at least four times as large as last year’s which was already the largest on record. And, no, the fact that the last administration had such a large deficit doesn’t justify the current administration quadrupling it. We don’t allow our kids to justify bad behavior by pointing to other bad behavior – we shouldn’t let our Presidents do it either. And we’re rapidly approaching the point where no one is going to want to loan us any more money. Even the Chinese are getting nervous about our level of deficit spending. So where are we?

We’ve seen that it’s awfully hard to stop spending on a government program once it’s been started, so #1 is the hardest thing of all to do. #2 can certainly be done – and there are two ways to do it. One is to grow the economy, so that the same tax rates, or even lower tax rates, will yield more revenue. This is called “supply side economics,” and despite the fact that it has worked every time it has been tried, the Democrats still maintain that it doesn’t work, so we can’t do it. The other is to raise taxes. And don’t kid yourself that only the richest Americans will see increases. You could raise their income tax rate to 100% and still not offset this year’s deficit.

Governments, however, do have another choice other than going broke. They can simply print more money. Unfortunately, this causes two bad things. The first is inflation. If there’s more money in circulation, but the supply of goods and services to be purchased hasn’t increased, prices go up. The second is rising interest rates caused by the inflation – if you loan someone $100, and you know that the $100 you get back in the future won’t have as much purchasing power, you’re going to demand higher interest on your loan.

The current administration is spending money at a rate that makes drunken sailors, Alaskan Pipeline workers, and turn-of-the-century loggers hitting town after six months in the backwoods all look like Ebenezer Scrooge. It has to stop. All the “hope” in the world isn’t going to “change” the basic laws of economics. Some of us remember the days of high inflation and double-digit mortgage interest rates. They weren’t fun…and what’s coming down the road will make those look like the good old days.

Thanks for listening.