Friday, October 15, 2010

Grow, Cut, and Print or Default

Niall Ferguson the author of 'The Ascent of Money' gave a great speech in May. In it, he explored the implications of public debt.

Niall makes the point that Government expenditure programs throughout the West are in about the same place as Greece and that they will all have crises. Greece was able to get bailed out because of its diminutive size. The UK, the US and others will not be able to do so.

He points out that throughout history serious political instability has resulted from public finance crises. Throughout history, national weakness and often fall has accompanied such political instability. It appears we are headed down that path.

US Expenditures in 2010 were $1,290 Billion more than receipts, which were estimated at $2,318 Billion. That means that we spent $3,608 Billion. We spent 55% more than we took in.

We spent $1,421 Billion on Social Security, Medicare and Medicaid. 61% of all federal receipts were spent on these three 'safety net' programs.

By Niall's calculations, many counties in the 'developed' world are headed into a deep period of public finance crisis. Each has a different potential approach to getting out.

Niall points out that only one country has escaped debt burdens the size of our current debt burden without default. That was the UK.

Niall opines that the options are Cut, Print or Default. In an aside to a question he adds that the US may be able to Grow.

Default on US Treasury obligations is not acceptable to the United States. Our options are Grow, Cut and Print, or face this unacceptable result.

Cutting requires electing responsible representatives to our democratic government who are willing to face changing Social Security, Medicare and Medicaid back to safety net programs; willing to reduce significant expenditures of blood and treasure on ill conceived overseas adventures; and remove the federal government from abusing its highly effective taxing capability to tax citizens and then give that money to other government entities, particularly States, to spend on programs and embarking on interceding in all aspects of American life simply because it can. Even with all these things done, cutting to a primary fiscal balance where expenditures are less than receipts probably requires additional taxation - although hopefully at the state level as the federal government exits numerous programs in many departments.

Printing will require that the United States Treasury inflate the currency at something akin to 5% per year for two generations. This will effectively confiscate money from bondholders.

Growth requires a return to the veneration of the entrepreneur. In this case, I mean two forms morphed into a single persona. First, is what I think of as the popular meme of entrepreneur. That leader of the 1990s wrapped around the huge growth rates and valuations of companies achieving significant technical innovations that resulted in the tech stock bubble - think Microsoft and Apple. But I also mean entrepreneur in the classical sense of small business owner - anyone who ventures out to produce goods or services in the economy on their own decision making authority. These two sets of business people drive growth because they aggressively allocate every resource - money and labor - to its highest and most efficient use. They do this at the margin and they increase productivity and reduce unit labor costs. That is why they are the growth engine of the economy.

Growth requires the rule of law and not the whim of a government of men that feel they can and should re-write the rules constantly and to the benefit of their political sponsors. A stable and reasonable tax and regulatory environment fosters growth through creating a predictable environment for entrepreneurs to operate within.

Accurate Reality: Grow, Print and Cut or face the prospect of a US Treasury default, instability in US political institutions and faster decline in relative world power, societal prosperity, and liberty.

1 comment:

  1. US deficit and debt levels are worrisome, but most people worried more about the entire economy cratering and thus tolerated the Rx during the crisis. Now, in the bright light, it looks differently. Ironically the program we railed most against TARP may actually have proven to be the most useful in stabilizing the crisis. The Obama stimulus looks like a major failure on two scores: First, it did little to create the new jobs promised because the rest of the Obama agenda offset the benefits with greater uncertainty thus encouraging business to hoard cash and hunker down. Second, the reckless spending drove up debt.

    If the 2010 election turns out to be the landslide 'throw the bums out' rejection of the Obama strategy there is still hope of turning the ship of state in time.

    The big question is whether the GOP learned its lesson from its banishment to the wilderness--or not.

    To grow and grow faster we need to remove the economic and regulatory uncertainties ASAP to unleash the cash sitting on the sidelines.

    To sustain growth we need to change the market dynamics by rewarding now penalizing domestic manufacturing and production to re-industrialize the economy. Dramatically simplify tax rates and make them globally competitive. And third, change our business regulations to make accelerating growth a key factor in streamlining the permitting and approval process to jump start growth.