The Great Paralysis

Ask around of your friends and acquaintances about the state of the economy and you may ascertain a particular kind of consensus: uncertainty. The latest job loss statistics (539,000 for April) are lower than expected by forecasters. The “stress test” results are released and it seems the 19 largest banks, with one or two exceptions, are in pretty good shape though 10 have been “instructed” to raise more capital. Government programs have been established to help out first-time home-buyers with tax credits, and there are some signs that the worst hit areas for declining home values are starting to show some signs of revitalization. Federal Reserve Chairman Ben Bernanke has said reservedly, that he expects the US economy to “turn up” in late 2009. The equity markets finished on a high note this week. All good recent news, right? So why are so many people, at least by my kind of informal consensus polling, still concerned about either their employment, business or the future? Why are they so uncertain?

The elephant in the room is the Federal deficit spending budget of $3.6 Trillion combined with an already existing $11.2 Trillion national debt. The 2008-2009 deficit of $1.3 Trillion inherited from the Bush administration, Mr. Obama says, will be cut to $533 billion by the end of his first term. This will be accomplished by cuts to defense spending related to the Iraq War, taxing the “rich,” and improving the efficiency of government. The President’s confidence in improving fiscal responsibility notwithstanding, I just think people are understandably skeptical.

Some of them may have tried to put it all into a personal perspective. After all, when you are talking “trillions” of dollars it is a little abstract. Doing a little arithmetic they may calculate that the new budget for the Federal government will cost around $12,000 for every man, woman and child in the country. Coupling that with an existing debt load of about $37,000 per capita and one has cause for concern, never mind uncertainty. A family of four can view itself as on the hook for nearly $48,000 to finance the Federal government services they consume next fiscal year and they face a longer term debt of around $148,000 which will grow larger each year. Putting it that way they may wonder just how much wealth the “rich” could possibly have at their disposal to be confiscated by the Federal government, and what happens if the “rich” go away to some other market where their capital is respected, or worse, they simply give up on wealth creation and start “working to rule”.

There is another well known complication. Congress has a history of creating more spending than any budget can inhibit. The same tendency does not bode well for any aims in the direction of program efficiency, even at the modest one-half of one percent of the new budget level so far touted by Mr. Obama as a step in the right direction. Just to add insult to injury, the Congressional Budget Office projections do not reconcile with the optimism of the President.

To paraphrase the President, “… outside of Washington we are talking about an awful lot of money.” But more precisely, it is wealth that we are talking about. Money is a specific kind of good, a medium of exchange. It represents wealth, or capital. Spending by government consumes capital in the present, and that consumption must come from actual savings in the economy. Many people understand this logically by using the perspective of applying it to their own financial circumstances. What they are uncertain about is how the huge deficits are going to be financed by the Federal government. (And this is before any considerations for spending at other government levels and by off budget enterprises like the Post Office.) What about future emergencies that may create a need for even more deficit spending?

There are only a few ways for government to finance the deficit. The most just and accountable method is by raising taxes to pay for government services. That is unfortunately not possible in the depths of a recession without further stifling economic growth as should have been learned from the history of The Great Depression. It also makes it hard for politicians to get re-elected, which may be more to the point. Variations, like fooling people into thinking that only the “rich” will pay taxes cannot last long before everybody notices the con as their bills go up with hidden taxes in the form of rising costs. Finally, there is the usual favorite stealth method of monetary inflation where the general level of prices goes up at escalating rates. This makes holders of debt instruments losers as they are paid off under contracts in old dollars. The debtors, especially the biggest one (the Federal government) win because they pay off debt in cheaper dollars. That is wealth transfer on a grand scale conducted secretively. The middle class evaporates with the loss of its command of goods and services and we are left with political elites and their dependents on social welfare.

With that kind of scary stuff to think about it is little wonder that normally self-confident people are worried and uncertain. If people are paralyzed with such worry, then too is the economy. The economy is the people, not the government. Some of them are trying to save, others are no doubt hesitant about using more credit, even at low rates. And with the government demand for capital to finance its spending plans, the prudent businessman may no longer be fooled by low interest rates and may defer expansion plans, especially given the government plans to “invest” even more in education, energy and healthcare. Everyone is trying to figure out where the next government-induced “bubble” will be and when the inevitable bust will follow. It is simply mind-numbing, and paralyzing, to have to think about what the State will do next.

Copyright 2009 Edward Podritske

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