We are in a crises. We have 44 million people on food stamps, a Congress that is incapable of making any legitimate tough decisions, a president and Congress that do not have a clue when it comes to economics (except maybe Ron Paul or Mitt Romney, it’s pretty clear Bachmann doesn’t know a thing thanks to her $2 per gallon gas promise), 9%+ unemployment, an enormous deficit ($1.2T), trillions of unfunded pension and Social Security future liabilities, and a tremendous amount of debt. There are a lot of people (including all of us reading this) that are responsible for this mess. In this article I will briefly discuss how we got here, what the future looks like, and how we can get back on the right track without experiencing an absolute train wreck economically. I will also discuss why Keynesian policies will always fail in the long run and the Austrian way makes much more sense.
This mess of debt started back in the 1980s with Alan Greenspan and the popular belief that the Fed was God. When Paul Volcker was Chairman of the Fed from 1979 to 1987 he put an end to easy money and inflation by dramatically raising interest rates (which by the way killed the rally in gold at the time as it made the dollar stronger). After Volcker left and Greenspan took over, we as a country decided to play God by manufacturing economic growth via the printing of money, cheapening money (lower interest rates), and going on credit binges that are now proving to be unsustainable. The biggest credit binge came over 20 years as housing prices rose dramatically and people borrowed money against these inflated unrealistically overvalued prices via home equity loans. Every time we started to enter a recession, (GDP = C + G + I + NX) and the C (consumer spending) would drop, we decided to make money cheaper and boost G (government spending) to keep GDP growing. No one wanted to take any short term pain. We sold our souls as a country bargaining for the good life here and now at the expense of future prosperity and what America has traditionally stood for; hard work and sacrifice, a land of opportunity and growth.
Along the way over this 20+ year period of unsustainable excess, we encountered uncontrollable, unregulated, and insatiable greed which lead to numerous banking crises, the most recent of which required substantial bailouts and enormous additions to our debt levels as private debts were transferred from corporations and banks to government balance sheets. A huge problem with our banks leading up to the 2008 crises was that they were over levered. Instead of solving the problem, we opted to kick the can and shift leverage from banks and others to the federal government (i.e. the taxpayer).
Socialism is great when it comes to public libraries, subsidies for education so that everyone can have access (ideally equal), and public transportation. Socialism fails miserably when it comes to almost everything else. Europe, specifically the PIIGS, are proving this as we speak. People become inept and lazy when they are given handouts in life and expect more in exchange for less. We will always have poverty, some unemployment, and suffering. Socialism leads to more of this in the long run, not less. Entitlements, easy money, and government handouts (whether they be big oil tax subsidies and farm subsidies or endless unemployment benefits) have made our country worse, putting us on a path to destruction and a depression like we are seeing Greece and starting to seeing Portugal, Spain, and soon Italy. As a nation we want more for less and reward politicians that give us this. We will keep you in office if you decrease taxes and increase spending, but if you dare cut social security or raise taxes you will be out the door.
Raising taxes will make some happy and some angry as would cutting entitlement programs or defense. Our leaders and we as a nation need to take our share of pain. Everyone needs to contribute to resolving this mess and we can’t punish politicians for making the tough choices even if it hurts us in the short run. Instead of trying to make everyone happy as we have in the past where the rich get tax breaks and the poor get free handouts we need to piss everyone off in a sense. A pissed of America is an America that gets things done as seen through the Revolutionary War when the British angered us, World War II, the Iranian hostage crisis, 1980 Olympics, etc.
I am an American, but I am an Austrian when it comes to economics. Lately we all have seen a lot of unemployed people out of the streets during the day rallying for the Tea Party and severe spending cuts (I assume they are not employed or they would not be on the street during the day). I agree with the need for spending cuts, but unlike these people who are looking for a quick fix and instant gratification (for the most part), I understand what spending cuts mean in the short term. Spending cuts will lead to a severe recession or depression for years to come as we begin the painful process of unloading our leverage (paying off debt). All the normal business cycle recessions that we put off in the past thanks to easy money policies have built up and will unload all at once. We need to take the pain now and control our spending and reduce our debt before the bond market forces us to do it like in Greece. It will be painful, but it has to be done. Greenspan was not God, Bernanke is not God, Obama can’t fix this in 2 years, and neither can Romney, Paul, Perry, or anyone else for that matter. We will have to suffer, the question now is, how much?
There are only three ways in which we can get out of this mess economically. The first is to cut spending and enter a depression (which we might end up doing anyway thanks to Europe). The second is to race to the bottom with every other country in regards to devaluing our currency so we can try to grow out of our debt. This second "solution" will not work as everyone wants to do this and no one’s demographics support it (aging populations and shrinking work force). The second "solution" will lead to inflation and destroying Grandma’s savings via her “risk free investments” as the growth via exports won't work. Yes you will still get your money in nominal dollars, but it will buy a lot less thanks to inflation (technical default) and your wealth will be lost. The third “solution” involves a combination of the two which the government will try and is trying (believe it or not) to implement. Bernanke and others desire to slowly cut spending over the next few years so that we no longer run a deficit. Then once our spending is in order we will have to address our debt. There is no way we can pay back the $14T+ that we owe and provide government pensions and other programs like Medicare in the amounts promised. Politicians can’t just abolish these programs altogether either. The result is inflation. A sneaky and stealthy default and tax on our obligations. People will get the number of dollars they were promised, but the prices of everything they need to buy with those dollars with go significantly higher. Inflation poses many problems and the idea that he Fed can control and manipulate it is absurd, it can take on a mind of its own when unleashed.
The Austrian School of Economics recognizes the perils that come with trying to play God with monetary and fiscal policy. They recognize the common sense idea that if you spend more than you can repay you will pay for it one way or another down the line. As a nation and in order to remain American, we need to become Austrian in this sense. We need to work hard and sacrifice as we have always done to stay on top.
I can only hope that the Fed, our politicians, and all Americans learn from our past mistake in believing in easy money and avoiding recessionary periods via lax regulation, printing money, increasing debt via spending, etc. In the future I hope that we will not sacrifice long term prosperity for short term gratification. That type of behavior is comparable to a 16 year old who drops out of high school because he doesn’t want to work hard in school. It will make him/her happy for a few years, but then he/she will pay dearly down the line. It’s time for us to take some pain. The smart and innovative will help us get out of this in the years to come as entrepreneurs create new jobs, even entire industry’s and put us back on the right track so that we don’t get derailed by reality coming head on at in the opposite direction.