Tuesday, May 17, 2016

Where does the money come from?

One surprising aspect of the current political circus is the degree to which Americans, and particularly young Americans, are buying into the notion that it is the proper role of government to provide for the welfare of its citizens, and indeed, that the government owes its citizens the unbridled enjoyment of certain entitlements arising out of their "rights".   

I say it is surprising, but shocking is more apropos.  How could it be that so many have lost sight of how the world actually works?  Is it possible that our educational system has deteriorated to the point where we've raised a generation so utterly clueless of basic economic realities, and bereft of basic math skills?  Apparently.

So let's break it down by asking some basic questions and positing some basic answers.  

When government spends a dollar on any government activity--police, armed forces, entitlements, or whatever--where does that dollar come from?  

There are three and only three sources of government funds by which every (national) government on earth carries out its functions:  (1) Tax receipts (including fees, tariffs, tolls, penalties, fines, etc.)  (2) Borrowed funds (sale of Treasury or Municipal bills, bonds, notes, etc.) (3) Printed or electronically created funds (including actual cash, coins, etc.)

So when our government spends a buck it has either (a) first taken it away from the citizens via some form of taxation; or (b) borrowed it from some investor; or (c) created it out of thin air, paper and ink (or a computer terminal, as the case may be).

So when the government purports to provide "benefits" to its citizens in the form of services or outright payments ("benefits"), it is actually either giving back some small portion of the dollars it has first extracted from those very citizens, or borrowed from someone with the promise to repay at a later date (with interest, of course), or with new money it has just created.

We could argue here that the third category of newly created money is itself a tax of sorts, an inflation tax whereby as the money supply grows beyond a certain point, the money supply itself is devalued in such a way that the unit value of currency is necessarily worth less because it buys less in the open market.  Print too much money too fast, and one gets the hyperinflation of a Weimar republic, or a Venezuela.

The fundamental dilemma and central problem of all governments is that they are incapable of taxing their citizenry sufficiently to satiate their appetite for expansion of authority and power.  At some point and at some level of taxation, the citizens revolt and demand transparency, accountability, and proper controls on government spending.  Of such sentiments came our own American Revolution.

Recognizing the above dilemma, governments discovered that they could actually shift the burden of taxing their subjects onto the backs of some future set of mostly unborn subjects who have no current vote, and certainly pose no threat of opposition.  In other words, governments discovered they could readily fund current spending and fulfill all manner of campaign promises ("more free stuff for you because you deserve it") and generate all manner of short-term goodwill among the citizenry without any real consequences.  By the time their borrowings would come due, they would be long gone from office.  

This is why almost all State governments in the US have state level constitutional prohibitions on deficit spending, i.e., borrowing money to fund operating costs of the state government.  

So when any politician runs around promising free stuff, whether in the form of more services (healthcare), education, or direct payments, it is always good to ask where they plan to get the money.  Will they increase taxes?  And if so, on whom?  Will they borrow it from future generations?  If so, is it ethical and moral to do so?

Progressive socialists finance their government expansion programs primarily through increases in deficit spending (borrowing).  This gives rise to a rapid expansion of the federal debt, which the laws of physics and economics tell us cannot continue to expand without limit.  There is a natural limit on how much any society can safely borrow, and that amount is precisely how much its economy can safely repay over time, with interest.  When total debt exceeds the ability to repay, bad things happen.  Just ask Puerto Rico, Greece, or Venezuela, where the worst is yet to come.  Will we be there too someday?  Probably.

So why can't we get the rich to bail us out?  Because it has been the experience of practically every attempt to "soak the rich" with higher taxes, that the rich simply find ways to relocate their capital and themselves into more tax-friendly societies.  The latest example is France, where upon announcing new liberal progressive confiscatory taxes on the wealthy, the wealthy simply left town and actual tax receipts dropped.  The US discovered this same phenomenon once again during the Reagan years, when a significant DROP in marginal income and capital gains tax rates actually resulted in both an expanding economy and HIGHER government tax receipts.  

This is known as the Laffer Curve, named after the economist Arthur Laffer.  The Laffer Curve reflects an economic reality just as gravity reflects a law of physics.  Does no one teach this to these American youth who support what Bernie and Hilary are selling us?

By way of summary, a government cannot give its citizens anything it hasn't first extracted or borrowed from them.  By definition, they must first take it away before giving part of it back!  Therefore, We the People always end up paying the price for our neighbor's free government benefits, and he or she in turn ends up paying for ours.  There is no one else, and no other source to pay for the bills we rack up--except once again, the silent and nameless souls of future generations who will be born into our debt and asked to pay for our lack of discipline in spending.  

One has to think that if everyone knew this principle, NO ONE could possibly swallow the socialist propaganda.  One would think.

We can never forget that for every dollar government extracts and then processes through the "system" in order to dole it back out to us in some form of "benefit", the return to us is always a fraction of that original dollar.  This is because the government process is inefficient, costly, and not subject to the rigors of market competition which force efficiencies, spur innovation, and drive costs down.  Who among us would gladly give away a dollar in order to get back 50 cents?  Yet that is the very proposition that government makes, and wants us to be happy about.

We almost always get less back from government than what we put into it.  The exceptions to that rule are few, and they include the extreme situations such as war and police protection, etc.  At one point in this country we could say that our education system was something that evoked an incalculably positive Return On Investment, but in light of the shear economic ignorance on full display in today's society, I'm not so sure.

So where does the money come from that government entices us with?  IT COMES FROM YOU AND ME, OR OUR GRANDCHILDREN YET UNBORN.  That's your answer.

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