The Question that Turns Economists into Babbling Children

There is a very bad premise operating in economics, specifically in the foundations of Public Finance. It is shocking that it has endured for centuries, especially in our modern era flush with a multitude of credentialed economic experts primed to investigate such matters.

For a large fraction of my life I have tried repeatedly to warn experts and knowledgeable thinkers of the errant rudiment, yet success is elusive. I have had the best in economics menacingly stare at me, nervously look down at their feet as they step away, or sever all communication. Recently, I queried the famed economics experts at the Mises Organization, bearing the name of the great Austrian and free market economist Ludwig Von Mises. After several exchanges with a small number of respondents, only 3 acknowledged the worthiness of my argument. The rest of the Mises people went childishly silent. They initially answered the question correctly, but could not fathom the profound and inexplicable implications issuing from that answer. Their bizarre retreat to safety and ignorance, not unlike those who favour the confines of the Platonic cave, seems a ubiquitous practice in the economics arena.

What plain question, eliciting a simple yes or no, easily renders these usually garrulous and learned people a babbling or petulantly silent child?

I simply ask what is the present deficit of the US Federal Government? It takes in approximately $3 trillion in tax revenues and spends about $4 trillion. The figures may be more or less, but let us just work with these. Everyone: economists, bankers, professionals, perhaps yourself, would say $1 trillion or the sum spent in excess of tax revenues.

That is an odd answer given that all knowledgeable people readily concede that the private economy funds government – all of it, which means that government has no money or income to settle its debts or bills; That its contribution to public expenditures is undoubtedly nil. Yet, by invoking a deficit equivalent to a small portion of public expenditures, it is effectively argued that government does fund government; That government furnishes the funds with which to pay its bills or settle its debts.

How to reckon the glaring discrepancy?

As Government is bereft of funds, it must be a perpetual financial loser, always turning to others, taxpayers and lenders, to replenish its embattled and deflating bank account. To construe the delinquency as the slight gap between the revenues of Taxation and total expenditures, i.e. the borrowed portion, challenges both sense and reason.

A fragile few insist that the taxed funds are government funds, an absurdity on its face. A glimpse of the financial records of government reveals unceasing inflows and outflows of funds, essentially a series of transactions reduced to, “Money expended, bill to the taxpayer.”

Government is not a Sears store inviting in and persuading customers of the values inherent in stocked goods with all transactions completed voluntarily. The public has no freedom to depart the government store with money intact. They must pay if goods are plentiful or scarce, exceptional or inferior, cheap or dear, vital or worthless, needed or not.

Payment by taxation is never measured against one’s use or consumption of a public good or service. Some are habitually in receipt of public goods and services, and pay little. Others rarely use them, yet pay inordinate amounts of tax.

Some have asserted that Government does garner revenues from certain profit seeking businesses such as utilities, from the development of mineral deposits and resources confiscated by the state, liquor marts and beer stores, postage, toll roads, rents from public lands, casino operations, etc.

This is somewhat true, but such ventures never operate freely in competitive markets among keen rivals. Public businesses, often granted a monopoly or armed with especial regulations, are well protected from challenging firms offering similar or superior products.

Does one ever call the money confiscated from the nation’s inhabitants and firms Government money? Some do, mostly government officials, employees, and politicians. Yet, the public sends elected representatives expressly to supervise the lawful collection and disbursement of funds. These representatives ensure compliance with accepted methods and principles of expenditure. Sadly, the performance of those assigned these roles has deteriorated badly with the relentless growth of government the last 50 years, but the roles remain.

One may view govt. finances as one views the finances of a dependent child, whose parents supply all financial and material needs. Whatever the child spends or requires comes from the parents. If he buys a toy, the parents supply the funds. If the child borrows to buy a small toy or a $100,000 sports car, the parents shall make good on the loan. To better understand the child’s finances, one must invariably look to the parents’ finances.

On the issuance and eventual settlement of public debts one may follow a similar path. Only by examining the aggregate wealth, property, and assets of those residing within a state’s sovereign domain, of those engaged in trade of goods or labour, will an enquiry into the worthiness of public debt bear fruit.

If the deficit were only a portion of public expenditures, I would argue that it is the taxed portion that should count as the deficit, not the borrowed portion. The lender cedes funds voluntarily for the financial inducement of interest offered by the government. There is no compulsion or coercion in the lender’s decision. His principle and interest arrives at the promised time. The taxpayer enjoys no such autonomy. The government demands and confiscates, and the powerless taxpayer must obey and yield. Regardless of one’s feeling on the issue, the taxpayer must eventually settle the public debt and interest incurred when tax revenues fail to supply enough.

As government possesses no hoard of money, no assets, no financial instruments with which to meet its daily needs, government cannot fund government. It does not fund public expenditures. It never has and it never will. The deficit comprises the whole of government expenditures, outlays funded by both Taxation and Borrowing. The aggregate public debt comprises every dime spent by government since its inception, not just the comparatively small, cumulative and accounted debt outstanding. Thus, the US Government’s deficit is actually $4 trillion, not just the misconstrued $1 trillion. Total Federal public debt in the US is not merely $20 trillion, but rather every dime spent since its inception approximately 250 years ago.

The Taxpayer, or more fittingly the resident citizen, and further still his property, assets, and income comprise the source of outlays for public expenditures. The assorted and bewildering impositions, i.e. taxes or more correctly fines or penalties, applied to wages, profits, consumption, savings, investments, property, financial holdings, inheritance, commerce, and trade supply the Government with the means to disburse, borrow and settle for the provision of public goods and services. The industry and wealth of resident citizens underwrites fully the items contracted for by the governing body.

The inability to recognize and account this palpable fact has fostered and reinforced the worst of conclusions, the worst of practices, and the worst of consequences.

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