Economic Chaos Ahead

Let's think about the kind of mess that we're in. Federal 2010 Medicare and Medicaid expenditures totaled $800 billion. The projected annual growth of both programs is about 7 percent. Social Security expenditures are more than $700 billion a year. According to the 2009 Social Security and Medicare trustees reports, by 2030, 49 percent of federal revenues will go for Social Security and Medicare payments. The unfunded liability of both programs is already $106 trillion.

But not to worry. The Congressional Budget Office estimates that it's possible to sustain today's level of federal spending and even achieve a balanced budget. All that Congress would have to do is raise the lowest income tax bracket of 10 percent to 25 percent and the middle tax bracket of 25 percent to 66 percent and raise the 35 percent tax bracket to 92 percent. That's a static vision that assumes that people will have no response and they'll work just as hard and send more money to Washington. If Congress did legislate such tax increases, it would be the economic equivalent of committing national hara-kiri.

Professor Daniel Klein, editor of Econ Journal Watch, and Professor Tyler Cowen, general director of the Mercatus Center, both based at George Mason University, organized a symposium to promote a better understanding of the U.S. debt crisis. The symposium's title, "U.S. Sovereign Debt Crisis: Tipping-Point Scenarios and Crash Dynamics" (http://econjwatch.org), is a strong hint about the seriousness of our nation's plight.

Professor Cowen introduced the symposium pointing out that in 2011, the major crisis was in the eurozone, where Greece, Italy, Spain, Portugal and Ireland dealt with the risk of default. The survival of the eurozone is now seriously doubted. Cowen added: "When it comes to a sovereign debt crisis, it is no longer possible to say 'it can't happen here.' Right now, we are borrowing about 40 cents of every dollar the federal government spends, and the imbalance has no end in sight."

Jeffrey Rogers Hummel, associate professor of economics at San Jose State University, says that a default on Treasury securities appears inevitable. He says that the short-run consequences for the economy will be painful but that the long-run consequences, both political and economic, could be beneficial. That's because an economic collapse is the only way we will come to our senses. That's a tragic statement about the foresight of the American people.

Participant Garrett Jones, associate professor of economics at George Mason University, is a bit more optimistic, seeing default as being less likely. But he argues that "default is still possible, and the GOP offers a uniquely American path to default: an unwillingness to raise taxes."

Dr. Arnold Kling is a member of the Financial Market Working Group at the Mercatus Center and tells us that the "U.S. government has made a set of promises that it cannot keep." He says that the "promises that are most important to change are Social Security and Medicare."

Joseph J. Minarik is senior vice president and director of research at the Committee for Economic Development. He argues that a "U.S. financial meltdown today is eminently avoidable. The wealthiest nation on earth, despite a painful economic slowdown, maintains the wherewithal to pay its bills. The open question is whether it maintains the will and the wisdom."

Peter J. Wallison holds the Arthur F. Burns chair in financial policy studies at the American Enterprise Institute. He agrees with Kling that "the most likely source of a U.S. sovereign debt crisis ... is a failure of the U.S. political system to address the growth of the major entitlement programs -- Social Security, Medicare and Medicaid."

My translation of the symposium's conclusions is that it is by no means preordained that our nation must suffer the same decline as have other great nations of the past -- England, France, Spain, Portugal and the Ottoman and Roman empires. All evidence suggests that we will suffer a similar decline because, as Professor Cowen says, "the American electorate has dug in against both major tax increases and major spending cuts."

Greece had 30 years of socialist ("PASOK") governments, it can destroy the nations (Portugal got to the same point in much shorter time, Spain is getting there fast). One third of the Greeks work for the government, even more are dependent on the government.

See The State of Greek Business - FR post #52, 2010 February 10, (GreekCentral, by Tom Mazarakis)

The U.S. also now has the highest index of dependency on government (Kaslin, you could post the article and enlarged chart on a separate thread, if you like):
Dependency Index Surges 23% Under President Obama - IBD, by John Merline, 2012 February 08

If you look at the chart, it shows only two short dependency slowdowns (dips in percentage terms) - one when Reagan was President and one when Gingrich was a Speaker of the House, and one brief dip during the height of speculative housing bubble.

Combination of economic growth, through a mix of accommodating sane tax regime and removal of stifling laws and regulations, and actual cuts or freeze in government spending has always been a true and tried economic solution to these challenges, the problem, as usual, is not the absence of economic solution but the will, or lack of it, of the political class and the people themselves, who are more than willing to be dependent on the "government," i.e., on Other People's Money.

Going back to the "gold standard" is a phony "solution" to the phony and real problems. There have been recessions, depressions, periods of inflation and, even worse, deflation during the "gold standard" in the U.S. and other parts of the world. "Gold standard" has never prevented governments from overspending and running the deficits and doesn't make them economically and/or fiscally responsible. It's a feel-good, ineffective, wrong mechanism to the wrong problem.

"Gold standard" is not much different from the diamond, silver, art or wine "standard" - almost anything can be considered "unit of exchange" and "store of value." Most of Europe is not on gold standard, it's on Euro (€, a "fiat currency") and the eurozone nations have the same central monetary authority - the European Central Bank (ECB). Yet there is a vast difference between economies and fiscal governance of Germany and that of Greece and other PIIGS. Same currency (Euro), which is not tied to the "gold standard," same central bank, but huge difference in the standard of living and government spending and fiscal accountability and responsibility, even after spending $1 trillion on West-East reunification.

See Germany Resists Austerity in Budget - FR, post #29 / WSJ, 2011 November 12
"..... Berlin is enjoying its lowest unemployment in decades and the government is still finding money to spend on infrastructure and income tax cuts ......" -

Switzerland has its own currency (Swiss Mark, SM) and went off the "gold standard" in 2000. Contrary to all "fiat money always depreciates" (against what?) theorists, the Swiss Mark has appreciated so much and recently so fast against the Euro and most other currencies (because it's bought more, as a "store of value" since it is deemed safer) that Bank of Switzerland decided to peg it to the [potentially "unsafe" and depreciating] Euro, as part of general "competitive devaluation" of their currencies that many countries in the world (including the U.S., Japan, China etc.) have engaged in lately.

Obviously, going off "gold standard" didn't create a "common" problem for Swiss Mark because country is fiscally managed better than other countries. Sound government fiscal policies make for sound money, not feel-good gimmicks like "gold standard" (whether it's a "gold specie standard" or "gold exchange standard" or "gold bullion standard") or abolishing / "auditing" central bank.

As long as one can freely trade gold (physical or "paper") one can be on his/her own "gold standard" or any other standard, for that matter.

Really free economies should not be constrained by artificial dependence on the amount of particular metal or substance that can be available at any given time, but neither they should be constrained by the artificial limitations imposed by the capricious and fiscally irresponsible "vampire" governments that drain resources from private economy to benefit themselves and, marginally, the dependent class at the expense of productive class.

Re: Economic Chaos Ahead

This author and the “experts” he quotes all display an invincible blindness and a lack of any attempt systems analysis.

Adjusting taxes and spending are only two of the means to attack the problems (plural).

Of first importance is the evil twin; our trade deficit and its Siamese twin, the practice of shipping jobs out of the country. Tax revenues come from these jobs, duh!.
Commerce with China is immoral, to begin with. We are getting what we deserve in the matter in trade with China. It is the prime cause of our problems.

Other possibly more important factors are illegal immigration (the wrong immigrants) and their huge net drain on our economy, the declining birth rate,
the deterioration of the family and religions, and the lack of a robust and healthy American tribalism.

Proposing fixing things by the taxes and spending route while not even mentioning these possibly more important factors is simplistic.

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