People often ask about solutions to the decline of living standards, the soaring costs of everything from housing to education, the decline of traditional manufacturing on U.S. shores, the depletion of saved capital for investment, and the growth of government power, which has compromised personal privacy and freedom of speech. The most immediate answer to it all is budget cuts toward an actual balanced budget.
Budget cuts would force the federal government to make hard choices. Agencies would need to be curbed, cut, and eliminated. An across-the-board chop of 1 percent to 2 percent of gross domestic product would affect everything, and there would be howls from dependent institutions around the country as well as the permanent civil service. Lawsuits would fly as never before.
But at least it would start the process of solving the problems. The Federal Reserve would be relieved of unrelenting pressure to monetize the debt. The flow of debt would start to abate, which would begin to dry up the spigot of funding to foreign central banks that are building huge industrial bases to compete with U.S. production. With a stable money stock, inflation would be less intense and prices could adjust downward toward rising rather than falling purchasing power.
Private investment would increase because Treasury debt would stop crowding out the space that would normally flow to valuable production projects. Interest rates would eventually fall in line to match savings levels. With more discretionary income, U.S. savings might also increase.
Budget cuts would also reduce political polarization that results, in large part, over how a vast federal budget is going to be deployed. With a severe austerity affecting all government services, Americans would be encouraged toward solving their own problems and recovering the traditional spirit of independence and self-reliance.
Maybe the public could start to get the hang of this freedom thing again, and the cuts could go further and further back. And to be clear, when I say cuts, I mean the word in the way regular people use the term, as an actual cut in existing spending.
For many decades, Washington has worked to redefine the term to mean a cut in the rate of increase. No household can possibly function this way. Imagine making a budget for next year that assumes a 5 percent increase but then you trim that to 3 percent growth. Try explaining to your accountant that this is a cut, and he will look at you like you have lost your mind. But in Washington culture, this talk is completely normal.
An actual and sustained budget cut has not happened since the end of World War II, tragically. It’s as if the presumption that government must always grow larger is built into our fiscal policy, regardless of the limits placed on government by the U.S. Constitution.
As a consequence, the Federal Reserve has been very busy buying as much of the debt as possible, resulting in inflation. The rest has been marketed as secure assets to be held in banking systems around the world. This has built a global economy on the sands of debt and that now sits at the precipice of disaster. This simply cannot last.
The inflation of the past four years should be our wake-up call. And contrary to what everyone is claiming now, the problem is not gone. For many Americans who are just now realizing how devastating it has been, the problem is more intense than ever. We are not back to where we should be. Inflation, even under the best estimates, is still running 50 percent ahead of target. It is getting tiresome to hear daily claims that the problem is now gone, when all of us know otherwise.
If the experience of recent years doesn’t wake us up to what needs to happen, I’m not sure what will. And yet even now, the main explanation of inflation that we hear is that it stems from corporate greed and price gouging, a ridiculous explanation that is pure fiction, as anyone involved in any business enterprise knows. We need a forthright admission of the truth: The inflation is a direct result of Washington living beyond its means, and the Federal Reserve is making that possible through its magic powers to create something out of nothing.
So, yes, in my fantasy we have a generation of public-spirited politicians who fly into action and do the right thing by slicing away at the preposterous expenditures. They can cut back by one year, 10 years, or 30 years. It doesn’t matter, provided that they start somewhere and prepare the public for what is coming. We need a true consensus on this, and someone somewhere needs to at least start the conversation so we can cease to live this lie that the debt can rise forever with no consequence.
All talk of budget cuts runs into a thick wall of blockage, however, one that is best explained by what’s called the “public choice” school of economics. The fundamental problem is that every bit of government spending has a constituency that is hyper-focused on preserving its something for nothing. Meanwhile, the marginal cost of each expenditure is spread throughout the population in ways that do not fire up passionate objections.
The formula here is usually expressed as “concentrated benefits vs. diffuse costs.” That’s why it is so hard to cut the budget. The pressure groups that benefit from existing spending are well-heeled with vast lobbying forces out there, and they are well-positioned to call in favors from the politicians whose reelections they funded during campaign season. It is a straight-up quid pro quo. Why else do you think that rich corporations and lobbying groups give to politicians? It’s not about being public-spirited. It’s about the expectation of some financial return.
In other words, there is no benefit to any politician for voting for budget cuts. There is only cost: lost donations, angry pressure groups, and a howling media. Why would they ever do it?
A dramatic effort to cut the budget, shared by both parties and all ideological impulses, would be the only way to end the logjam. Above all else, this needs genuine leadership. It can come from either party or any main candidate. The point is to make the case to the public and give the politicians cover for what they need to do.
It has been decades since we’ve heard any talk about this subject, so just the mention of the need to cut back will be a shock to the media, which will quickly seize on supposed victims of budget cuts and weave countless stories of suffering and woe. The point is thereby made: The beneficiaries are concentrated and the costs diffuse. Standing up to this machinery will be exceedingly difficult, the challenge of a generation.
And yet consider the benefits of ending a public policy that is so addicted to debt that it cannot imagine functioning without it. It would end inflation and even bring prices down. It would lead homes to become more affordable and groceries, too. It would free up investment capital. It would stop the pillaging of the industrial base and actually kick off the rebuilding process. The small manufacturers who survive now could grow and gradually come to put America back to work again in something other than baloney jobs.
There are many ideas out there for saving America from what otherwise seems like a fate that everyone dreads, namely gradual decline. It can be reversed, but it will take courage, focus, and persistence. A balanced budget with existing or even lower income streams is the best and most sustainable way forward.
