government spending – Helping Families Flourish

Originally Published in Flourishing May/June 2013

As many of you know, we are members of The Golden Circle, a group that provides support for a series of events performed by the South Kansas Symphony, led by Dr. Daniel Stevens. Daniel is doing a fantastic job, both with the South Kansas Symphony and with the Southwestern Youth Symphony. And, Daniel is himself a wonderful musician.

Anyway, at this season’s finale, Daniel presented me with a plaque which says simply, “Life Is Good”. Daniel said that he chose that message, because I’m always smiling. He couldn’t have paid me a higher compliment. Why do I mention this? Simply to establish my credentials as an optimist. And, yes, I am bragging. Optimism is a state of mind, and as such, it is not something you’re born with; it is something you work to develop. (Ask my children, I used to be grumpy.)

But, did you ever hear me say that we don’t have problems? No, you didn’t, and you have no idea of the troubles I’ve seen. Nor will you, because I don’t allow trouble to define me. Indeed, part of my job as your advisor is to help identify your troubles and aspirations, to put both into a rational perspective, and deal with them in a positive way.

So, the issue I hear about most frequently from clients is that our federal government continues to spend irresponsibly—as it has for most of my lifetime. But, now it’s worse than ever. As Ben Stein’s economist father, Herb, famously said, “If something can’t go on forever, it won’t.” But, life will go on; and here’s the key point—BETTER THAN BEFORE. That will be true, because it has always been true. That is my faith.

Still, according to the federal government’s own actuaries, unfunded liabilities for things like Social Security and Medicare and federal employee pensions now exceed $87 trillion. That doesn’t include the official $16.7 trillion national debt. The population is about 315 million people. Not counting the official $16.7 trillion national debt—and not allowing for cost-of-living adjustments—the average American owes over $275,000 for America’s unfunded liabilities. (I’m not counting PPACA (Obamacare), either, but that’s an issue for another day.)

Looking at this more optimistically, I realized that if I’m the average American, Uncle Sam owes me $275,000 in future benefits. So, here is my offer: The government says my life expectancy is another sixteen years. Pay me now, instead of later. I’ll even take a haircut. In lieu of all future benefits, pay me today with a $100,000 Treasury bond with a guaranteed rate of 5% (the long-term historical average) and maturing in sixteen years.

Over sixteen years, I’ll collect $80,000 in interest on which I’ll pay tax at the optimistic rate of 25%. The Feds will get back $20,000 in income tax payments, leaving a net cost of $160,000 ($100,000+80,000-20,000). If I don’t live sixteen years, my heirs can either sell the bond in the open market or hold it to maturity. And, let’s be fair about this: Give every American citizen the same haircut, with the face amount and the maturity of each person’s bond based on today’s life expectancies. I haven’t figured out how to treat people born tomorrow and the next day, but…

…I realize that the real solution needs to be a bit more sophisticated than my example here. Whether my proposal is adopted or not, you can be sure that something like it—a haircut for virtually everyone—will have to happen at some time, because as Ben Stein’s dad told Nixon, “If something can’t go on forever, it won’t”. And, that’s really a good thing, because…

…out of fiscal necessity, I’m convinced that America must and will find a way to return to its founding ideals of self-determination and family responsibility. The $trillions now committed to a very long list of wasteful entitlements—not to mention countless other stupidly expensive commitments—will be free to flow into privately funded miracle cures and “for profit” space stations; to name just two possibilities. But until then, don’t waste your mental energy on things you can’t control. Ignore the “news”, if that’s what you have to do, and force yourself to notice and appreciate the good things in your life. As my first self-help mentor, Earl Nightingale, always advised, “Begin each day with an attitude of gratitude”. It really is a wonderful world out there—and that’s why I’m always smiling! mh

Originally Published in Flourishing July/August 2010

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on the well-tried principles of laissez-faire to dig up the notes again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there would be no more unemployment,…the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.”

—John Maynard Keynes, The General Theory of Employment, Interest, and Money, Great Minds Series, Prometheus Books, 1997, p 129.

The term “Keynesianism” is in the news, and several of you have asked me, in effect, “What is Keynesianism?” Sadly, the answer is embedded in the nonsense quoted above, but the question deserves a more definitive response.

Keynes was a British subject who lived from 1883 to 1946. The work cited above was first published in New York City by Harcourt, Brace, and World in 1936. Keynesianism is the economic school of thought derived from Keynes’ work, as developed in his “General Theory”. It’s in the news because it’s the economic policy of the Obama administration and the current Congress, e.g. “stimulus” spending, financed by new government debt.

The fundamental aspect, then, of a Keynesian “stimulus package” is the government’s deficit-financing of consumer spending and make-work projects. Keynesians assume that this will cause an increase in employment and production as a way of replacing what is consumed by the stimulus spending. In some degree that may be true; just as consuming one’s savings and acquiring more debt may motivate an individual to seek a second job. I believe the bankruptcy courts might show that’s generally not a good plan.

Our representatives in Washington perennially promise to avoid wasteful spending, but from the point of view of Keynesianism, the bigger the make-work project, the better. That was made clear by Keynes himself in the citation above. And, he continued on the same page with this little gem: “Pyramid-building, earthquakes, and even wars may serve to increase wealth.” If that’s all true, the BP oil spill, along with a good hurricane, should serve to enrich the gulf coast. And, instead of filling up coal mines with bottles of banknotes, we should spend “stimulus” money on today’s equivalent: “green jobs”.

Sarcasm aside, what the economic system really needs for recovery – whether from natural disasters, industrial accidents, or a severe economic recession – is saving and the accumulation of new capital, not deficit spending and make-work projects. In the wake of the housing and mortgage meltdown, new saving and capital accumulation could replace the financial capacity that was lost through the mal-investments of homeowners, homebuilders, banks and other financial institutions. Savings and capital accumulation represent money that can be put to work by businesses (large and small), producing goods and services that meet the real wants and needs of consumers. It’s in that process that real new jobs are created. It’s my opinion that the virtuous cycle of job-creation and prosperity begins with saving (not spending):

Saving leads to capital accumulation, which leads to greater productive capacity—including the creation of productive jobs—which leads to more consumer choice, which leads to more consumer spending and the satisfaction of individual wants and needs, which leads to business profits, which leads to saving and capital accumulation, etc.

Antithetically, Keynesianism—as history and logic have repeatedly shown—destroys savings and capital investment through deficit-financed government spending.* mh

* George Reisman, Keynesianism: A Critique, Capitalism: A Treatise on Economics, Chapter 18, pp 863-894, Jameson Books, 1996.

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The Virtue of Saving vs. J.M. Keynes