Don’t take my word for the national debt problem.  There is a new documentary I just went to see on the subject.  It is entitled, “I.O.U.S.A.”    The main force behind the movie is the former Controller of the United States, David Walker; essentially the chief accountant of the government.  It does an exceptional job presenting the facts on the issue of the national debt.

The data is even worse than I portrayed it.  In addition to the national debt, which is essentially bonds floated by the government to pay for its lack of balanced budgets, there are the unfunded mandates.  These are required programs passed by Congress, yet not yet given money for.  At some point, the law requires that these mandates be funded.  This means that the real national debt is (drum roll) $55 trillion dollars!  The documentary shows how we are addicted to debt.  In economist’s terms, we are addicted to getting stuff and putting off paying for it to future generations.  If you are a relatively young person, you should be outraged.  Not only should you stop demanding that the Federal government wipe your nose every time it runs, but you should insist on drastic spending cuts and budget surpluses so that the debt can be paid off. 

Not only should we insist that this be done on the government’s part, we should stop doing it in our personal lives.  The documentary should the Saturday Night Live skit called, “If You Don’t Have the Money, Don’t Buy It!”  This humorous segment shows a man selling a one-page book, essentially saying that if you don’t have the money, you should not buy the product.  The couple listening to him have the worse time figuring out the concept.  Far fetched? Check your acid-test ratio.  The acid test ratio, adapted for private citizens, is:  cash on hand + marketable securities + net expected salary for a year/current liabilities (in other words bills owed for the year).  If this is a negative or near negative figure, you have a problem, and need to pare down your debt.  The first step in this process is stop buying non-emergency stuff on credit!  The next step is to make more than minimum payments.  Ask yourself, “Why should I imitate the profligacy of the Federal government?  Then go see this movie!!!

Dear Dr. Luckey,
As I understand it, the total national debt is now $9.6 trillion.  How did that happen, and what are the implications of this enormous debt?

When a credit card company gives you a credit card, they give you a credit limit with it.  This limit is based on your current debt, current income and the likelihood that you will be able to make the payments.  So, if they give you a $500 credit limit, that means that you either have a low income and/or very little credit record.  If they give you a $25,000 credit limit or more, that means the opposite of these.  In any event, there is a limit as to how much you are able to charge.  If you could raise your own salary to meet your credit obligations, there would be very little problem with a credit limit, because if the payments got too difficult, you could merely give yourself a decent raise.  But suppose that the credit card company allowed you to raise your own credit limit, and would ask no questions.  With this, suppose the credit card company would let you pay more or less whatever you wanted toward the debt.  Well, you thought I was crazy before, now you see clearly that I need to be sent to the funny farm.  What company would ever do that?  The answer--none!

There is a good reason why this would never be done.  Despite popular opinion, money does not grow on trees.  Wealth actually has to be produced, and that is done by production.  Productivity increases—wealth increases.  Credit is based on an estimate of increased productivity, and therefore, increase of wealth in the near future.  Giving credit with no increase in productivity in sight is like flushing it down the toilet.

But this is how the Federal government actually acts toward money—your money.  The Founding Fathers rightly prohibited an income tax in the Constitution.  But in 1913, the wool was pulled over the eyes of the American citizens and they approved an amendment to the Constitution approving such a tax.  I asked my grandmother (who was born in the 1880’s) why people fell for such an idea.  She said that the promoters promised that the tax was only going to be ½ of 1% and it was only going to apply to the very wealthy, like J. P. Morgan and others like him.   Who could resist?  The government could have more money for a slight tax on the super-rich.  Well, this lasted a year or two and then year after year it crept up to what we have today.

But, you say, that explains only the big Federal spending spree that has been going on since 1913.  It doesn’t explain the debt.  

Good insight.  It is in everybody’s self interest to try to get something for nothing.  If you see something at a yard sale for $.10, and it is something you’ve been looking for for years, you consider it a steal.  But it really is not.  The person selling it doesn’t want it.   You lucked out, and so you should rejoice. 

The government does a similar thing.  They sell services for votes. A vote is not worth much economically, maybe one trip to the voting place, or maybe two a year if you vote in the primaries.  In exchange, you get police, fire protection, free schools, protection from foreign enemies, welfare, Medicare and Medicade.  But wait, you say, I have to pay for those, don’t I, with taxes?  True, but here is where what Hayek calls the “fiscal illusion” comes in. In exchange for the services you receive, the cost is spread out over those who receive, and those who do not receive, the services.  Public schools, for instance, are paid for by everybody:  childless couples, single people, those sending their children to private schools and already paying tuition, home schoolers.  So you are not paying dollar-for-dollar of services.  Also, to keep the taxes down, the government does not pay for all of it either.  Every year the Federal government spends much more than it takes in, in order to be able to buy votes yet avoid a tax revolt.  It borrows money and even prints money to pay its bills.  This means that the real cost of government is no where near what you pay in taxes.  It is estimated that the Federal government this year will spend nearly $400 billion than it takes in in taxes.  That means that you received 16% more in services that was paid for by taxes, and the rest was paid for by borrowing and/or printing money.  This debt accumulates every year, and no one has the will power to do anything about it, despite the cries of economists and outraged citizens.

Who is going to pay all those bonds when they are due?  You, your children and grandchildren.  Debt service, i. e., the repaying of the bonds runs about 19% of the Federal budget each year.  It will increase as the larger deficit bonds come due.  This is like you paying 19% of your income on paying off your credit cards, but the amount you borrow each year increases.  So if you net $30,000 per year, you are then paying $5,700 to credit cards with no end in sight.  This also means that you buy substantially more than $30,000 in stuff each year.  If this in very imprudent for a citizen, why should it be permissible for the government to do it?  

In the latest edition of an otherwise scholarly theological journal, a writer, who only ever writes about one subject, attacked the free market as usual.  He wrote:  “Neither can economics be satisfied with leaving human beings to the mercy of markets with their supposed ‘laws.’. . .”  While there is certainly no space to take on his whole article, this part might just be the most serious error in it.

This particular writer, and those trained in his school, which he denies is the German Historical School, but it is, operate from a nominalistic approach.   Nominalism, a school of thought begun in the Middle Ages by the Franciscan, William of Ockham, denies that there is any human nature.  Therefore, human beings have no necessary consistency in them.  In ethics, each person makes up his own code, and the codes can be very much at odds.  To a nominalist, everything is will alone, not reason.  This is why the writer in question asserts that people are at the “mercy of markets.”  To those who think like this, everything is power.  Even in moral theology, the reason one obeys the Ten Commandments is that it’s God’s will only, and there is no connection with those commandments and the nature of things.  God could have commanded ten other things we were to avoid, and we would be required to obey them, because they are His will, even if they were the opposite of those actually listed.  (I am sure many people would not have any trouble with the commandments were that the case)  Thus, to those who think in this manner, markets are power, and that’s why there are no laws of economics.  That’s why corporations are evil; because money gives them power, which they use to take advantage of others.

The truth of it is that human beings do participate in a common nature, created by God, and this common nature leads people to think and act alike generally speaking.  The laws of economics come from this consistency of human nature.  Markets do have laws because people make free choices as to what is best for them.  The market exists for the sake of the consumer, which includes everybody.  If I go to the store and want to buy bananas, and the bananas are rotten, why should I buy them; to support the farmer or the store?  If we all did that, people would be encouraged to make junk and I would be encouraged to continue to buy it even if it did not fulfill my needs.  Why would I do that?

Let’s take the example to a higher level.  I know that there is a demand for office space in my city, so I want to build a tall office building.  The office building has to be tall because land in a city is very scarce and therefore very expensive, so I have to build “up.”  To do so I need strong steel.  If company X has crummy steel, it will not hold up and the building will come crashing down at the first sign of stress.  So I must go to company Y that sells steel that will be appropriate to the height of my proposed building.  Should I buy the company X steel because I feel sorry for the workers who will not get my business?  You tell me; rather you go tell that to the families of the victims of my collapsed building.  
Will the steel from company X be cheaper?  Perhaps.  If I buy it and the building comes tumbling down, am I evil?  Well, we cannot judge the soul of another, nor can we read his mind.  One thing we do know is that this builder did ignore the laws of economics (and probably those of engineering as well).
Think about the decisions in your life, and see if there are no laws governing your decisions.  If gasoline is $.10 per gallon cheaper in the next town, which is 45 minutes away, would you think it is worth it to drive there to get that particular gas, given not only the price but the time involved, and whether it is raining or snowing, and other things that you have to do?  Well, you just did a cost-benefit analysis, which every sane human being does in their head many times a day whether they realize it or not.  How can anyone say that there are no laws of economics.