Elko Mike - Insanity and problem solving

Insanity and problem solving

Einstein is credited with creating the definition of insanity when as a patent clerk in Germany he said it was "doing the same thing over and over again and expecting different results." Not as widely quoted, but just as applicable to our current situation, was this observation: "No problem can be solved from the same level of consciousness that created it." Our debt and deficit problems were created by an elite class in Washington and now many of them have been replaced. Perhaps with this new level of consciousness we can solve this problem. Conservative voters need to keep an eye on the current chattering class in Washington to make sure they fix the debt and deficit problem.

The Debt and Deficit Problem
Politicians talk mindlessly about stimulus, tax cuts, and policies as means to solve our ills. As most of us manage a household budget, we understand the problem:

• If you spend more than you earn, then you run a deficit
• If you run deficits consistently then you have a debt problem
• If you have a debt problem then you need to make some spending cuts

However many in the chattering class believe they have more options to solve the debt and deficit problems.  They can raise taxes to increase revenue.  A family trying to make ends meet can't ask their employer for a raise because they are spending more money than they earn, but government thinks nothing of levying more taxes upon us to fund their spending.  They also control the printing presses and can print more money.  Finally there are some who argue that government spending gets the economy going.  Let's deal with these ideas.

Government Spending for Stimulus
It doesn't work as Bastiat pointed out in 1850.  He used the example of a broken window to illustrate the fallacy of this idea, and his refutation of this idea is called the Broken Window Fallacy.  In this illustration, Bastiat observes that wayward politicians only highlight the benefits of their programs and never the costs.  Almost all government proposals are examples of this fallacy and when this is understood it is easy to see through a politician's argument in support of their pet project. 

More Taxes Will Fail to Close the Deficit Gap
The first fallacious point in the government's case is that they actually raise taxes.  They don't.  To be picky about it, government sets the tax rates; whether or not taxes go up depends upon how the victims of the intended tax increases respond.  George Will captured this in an essay about the Kennedy taxes on luxury yachts.  The unintended consequences of this tax rate change was that tax revenue to the government went down and the luxury yacht business was decimated in Massachusetts.  Eventually this luxury tax, which was created to sock it to the rich, was repealed as a matter of fairness to craftsmen who build luxury yachts.

The other problem for the government -- they are generally in denial about this -- is that increased government spending reduces economic growth.  Government taxation is at such a level now that the private sector will be unable to recover the jobs lost during the past recession.  If the government tries to tax their way out of this, the economy will shed even more jobs and with fewer taxpayer revenue shortfalls will increase.  This argument is captured well in a Work For All Report, and a critical graphic from that report is inserted directly below.  With this graphic it is clear that more government reduces economic expansion and job creation. 

So the government has now gotten large enough that it can't tax its way out of this problem. 

Printing Money
There is no free lunch and the government can't print money to cover its debt.  But what if they tried?  The money supply will be greater than the value of the goods and services produced by the economy; that is printing money brings on inflation.  With inflation the value of savings is diminished and those on a fixed income can buy less with their money.  By printing money the government has, in essence, implemented a tax on the value of money and reduced its value.  So while this in principle can solve the debt problem it will take money from everyone.  Moreover it will cause the greatest harm to the most vulnerable in society.  The final issue with it is that it is difficult to stop inflation once it is started.  The medicine is higher and higher interest rates until inflation is stopped.  This is the Jimmy Carter idea and it isn't very attractive.

Cutting Spending
All we hear from Washington is how we can't cut spending for essential services.  This statement presumes that all government spending is essential, and we all know that is not the case.  Since Obama has assumed the presidency federal spending has risen by 25%.  So there is room to cut spending.  Despite what the pundits say this is really our only viable option.  We need to shrink the size of government of we want to have economic growth and a reduction in the unemployment rate.  This is our only viable alternative.

Conclusion
The federal government has spent obscene amounts of money over the past few years.  It was all of them doing it, not just Democrats or Republicans, but all of them.  The new Republicans entering the Congress seem to understand that they have a 2nd chance.  Right now they are on message that they need to cut spending in Washington and they need to repeal Obamacare. 

As is clear with a little bit of thought, reducing spending and the size of the federal government is the only way to eliminate the debt and deficit problem.  Government must do what families do when economic times are tough and reduce their level of spending.

We the voters need to watch them to ensure that they actually implement spending discipline.  If they don't then we need to elect candidates who will cut spending in Washington. 

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