Americans, Poorly Educated in Matters Financial, Are Now Asked to Vote For More Government Spending Or For Less

What's a guy to do. One minute he's expected to understand the meaning of "GDP" and the next minute, the theories of John Maynard Keynes. Conservatives tell him that like any family that's spent more with their credit card than what they can pay off, the U.S. must reduce its spending. Liberals tell him that without the government spending more, there will be no money for guys like him to get a paycheck and that this will plunge America into a deeper depression.

I just finished reading in Time magazine, Aug. 8th, 2011, an article by Rana Foroohar, titled "Balanced-Budget Blues." She takes the line that now is the time for the U.S. to spend more; prime that pump, create jobs. And, for the poorly educated that sounds pretty good.

But, if we go beyond articles telling us who won last night's game, or what legislator posted a picture of himself in the nude on the Internet, we might notice an article telling us about the debt crisis in Greece. We see where its citizens are burning tires in the street, looting department stores, and upending vehicles. Why this crisis? Hasn't Ms. Foroohar just taught us that all the Greeks need to do is spend more Euros? And, if they don't have more Euros, can't they just print some? Isn't that what the U.S. has been doing?

Ms. Foroohar is, of course correct in one respect; namely, that managing the finances of a nation like the U.S. is more complex than managing one's family finances. America can borrow a hell of a lot more than any family. But, what's the breaking point? Why should anyone ever worry about jobs? Why not just have the government give them out to anyone who wants one?

The answer is that the government isn't God. It can't make something out of nothing forever. They can do it for a time, but not forever. Think of the government as a black box. It takes in money through taxes and fees (a form of taxation). It can also get money by offering anyone, who will take it, an IOU, also known as bonds. It then takes this money and gives it out as social security payments, health care payments, and payments to our troops, for military equipment, not to mention pocket airports to be placed in the home districts of worthy legislators.

It's not really all that complicated. So why can't countries like America, or Greece, or Italy or any number of other countries manage their economies any better than what they've been doing? In a word; "politics." Alpha type men and women love to rule. That's as true today as it was in Caesar's day. How wonderful it is to tell other countries what to do. How wonderful to be able to reward family and friends with cushy government jobs and lucrative government contracts. So great to get the most wonderful health care package in the country for yourself and your family.

But to get all those goodies, you've got to find a constituency. And, to get that constituency to support you, you've got to satisfy their demands. To buy the general public, Obama rammed through a health care program that is way beyond America's means. He told us "it's our right." Funny, it never used to be a "right", but, okay, let's say it is a right. Who pays for this right. Countries more frugal with health care for their people are not inclined to take our IOUs simply so that we can provide a higher standard of health care for all Americans than what is enjoyed by their own people. And, if we can't borrow it, do we impose ever higher taxes on American business and on our citizens. (Something little understood is that taxes imposed on business is ultimately paid for by the public.)

We do, of course, need taxes. (One of Greece's problems is that no one there seems to pay them.) But, what we take out of peoples pockets is no longer available to them to spend on goods and services. Okay, so we'll only tax wealthy people. But, for those who think they've discovered the philosopher's stone, a few facts are in order. Records show that a sliver of the tax paying public (1%) pays 38% of America's taxes. Let's look at the top 10% of America's taxpayers. They pay 67% of the taxes. Check my math, but that looks to me like two thirds of all the taxes we collect from all the people filing tax returns. (The top 25% of tax filers produce 86% of income tax revenues and the top 50% pay virtually the entire bill. In other words, 50% of American tax filers pay virtually nothing.)

These statistics come from Thomas G. Donlan who offered them in an editorial in the Barron's of 8/1/2011.

So what was all the hulabaloo over the "debt limit" and does it have anything to do with a "balanced budget." Let's start with the balanced budget. It's a budget where the money spent equals the amount of money raised from business and the public. Debt does not figure into the balancing of the budget, except for the interest to be paid on whatever debt is being carried. This interest must, of course, counted as part of the money that will be spent.

A debt limit is the highest amount of money that may be raised through debt (bonds). If a government spends more than it takes in, it will have to make up the difference by borrowing the difference (giving out more IOUs, otherwise known as bonds). If Congress were to impose a debt limit, it would be the same as telling the administration, "no more issuing of bonds." And, that would mean cutting spending. Horrors, horrors, horrors. Actually, it would be pretty awful. The U.S. would not, repeat, would not default on its obligations. That would be suicide. But, lots of programs would have to be reduced with little to no planning.

So how deeply should this country put itself in a financial hole? The relationship generally quoted is debt as a percentage of GDP. (GDP constitutes all the good and services produced by Americans. It is not something produced by the government. In general, if you want more jobs, you've got to raise GDP. Raising the GDP means promoting American business. That is never achieved by raising taxes.)

What I can't figure out is why our Congress didn't latch on to the Simpson-Bowles plan. It was there for Obama to embrace. It was there for the Congress to embrace. But, no; politics prevailed. In closing let me tip my hat to the Tea Party. They seemed to be the only ones to understand the enormity of the financial problem America now faces and the heavy lifting we must now do to get our house back in order.