The Perils of Economic Ignorance

by Ron Paul

Last week in this column I wrote of a perfect economic storm facing America, caused by a federal government that spends, borrows, and prints so much money that our dollars are eroding in value at an alarming rate. Year after year our federal government spends beyond its revenues, prints new money to pay its debts, and borrows hundreds of billions abroad in the form of Treasury obligations that someday must be paid. With too many dollars and debt instruments in circulation, and no political will in Washington to cut spending, we’ve created a monster. Our perceived prosperity depends on keeping the great debt and credit engine pumping, but the only way to attract new lenders to fuel the engine is higher interest rates. At some point one of two things must happen: either the party in Washington ends, or the supremacy of the dollar as the world’s reserve currency ends.

It’s a sobering thought, but a choice must be made. How did this happen? How did we get to such a state? The answer is found in the nature of politics itself. The truth is that many politicians and voters essentially believe in a free lunch. They believe in a free lunch because they don’t understand basic economics, and therefore assume government can spend us into prosperity. This is the fallacy that pervades American politics today. I believe one of the greatest threats facing this nation is the willful economic ignorance of the political class. Many of our elected officials at every level have no understanding of economics whatsoever, yet they wield tremendous power over our economy through taxes, regulations, and countless other costs associated with government. They spend your money with little or no thought given to the economic consequences of their actions. It is indeed a tribute to the American entrepreneurial spirit that we have enjoyed such prosperity over the decades; clearly it is in spite of government policies rather than because of them. I certainly have seen firsthand a great deal of economic ignorance in Congress over the years.

Few members pay any attention whatsoever to the Federal Reserve Bank, despite the tremendous impact Fed policy has on their constituents. Even many members of the banking and finance committees have little or no knowledge of monetary policy. Perhaps this is why so many in Congress seem to believe we can all become rich by printing new dollars, or that we can make 2+2=5 by taking money from some people and giving it to others. We cannot suspend the laws of economics or the principles of human action any more than we can suspend the laws of physics. Yet this is precisely what Congress attempts to do time and time again, no matter how many times history proves them wrong or economists easily demonstrate the harms caused by a certain policy.

I strongly recommend that every American acquire some basic knowledge of economics, monetary policy, and the intersection of politics with the economy. No formal classroom is required; a desire to read and learn will suffice. There are countless important books to consider, but the following are an excellent starting point: The Law by Frederic Bastiat; Economics in One Lesson by Henry Hazlitt; What has Government Done to our Money? by Murray Rothbard; The Road to Serfdom by Friedrich Hayek; and Economics for Real People by Gene Callahan. If you simply read and comprehend these relatively short texts, you will know far more than most educated people about economics and government. You certainly will develop a far greater understanding of how supposedly benevolent government policies destroy prosperity. If you care about the future of this country, arm yourself with knowledge and fight back against economic ignorance. We disregard economics and history at our own peril.

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Another “Emergency” Spending Bill

by Ron Paul

Congress funds the federal government through 13 enormous appropriations bills, but even an annual budget of more than $2 trillion is not enough to satisfy Washington’s appetite for new spending. As a result, a new category of spending bill has emerged, known as the “emergency supplemental” appropriation. There’s no real emergency, however; Congress simply needs a 14th spending bill as a grab bag filled with hundreds of pages of goodies for countless favored groups, industries, individual companies, and foreign governments.

It’s common for dozens of amendments to be added to the supplemental bill, all with more money for somebody. So-called emergency supplemental spending bills, once a rarity, have become the norm over the last ten years in Washington. There’s always some excuse why Congress cannot stick to its budget, so supplemental bills are passed to permit spending extra “off-budget” funds. “Emergency” spending now has become routine, planned spending. American taxpayers should know this latest emergency supplemental bill spends almost $92 billion, making it the largest supplemental appropriation in the history of the U.S. Congress. The entire federal budget was less than $92 billion in the early 1960s! Is there really an “emergency” that requires $1.2 billion to pay off our allies for their help in Afghanistan? If Pakistan, Jordan, and other nations chose to join our war effort, why can’t their taxpayers foot the bill? Won’t those nations in closer proximity to Afghanistan benefit from the stability we are told U.S. troops will provide?

Perhaps they should pay us for stabilizing their neighborhood. But it’s always American taxpayers who end up paying. What is the emergency that requires $36 million for taxpayer-funded broadcasting programs overseas? How about $30 million to build roads in Liberia? If we’re serious about spending money for emergencies, surely $92 billion could be better spent addressing the aftermath of two domestic emergencies, namely hurricanes Katrina and Rita. The real emergency is in Washington, where Congress is spending and borrowing America into a perfect storm. As economist James Turk explains, the federal government now relies upon debt to finance 20% of its spending. Low interest rates during the 1990s and early 2000s kept interest payments on government debts- Treasury Bonds and Treasury Bills- somewhat manageable. During the same period, however, the Federal Reserve greatly increased the money supply, which has caught up to us in the form of price inflation.

The Fed now must raise rates to combat this inflation, but higher interest rates will chill economic growth and slow tax revenue. To quote Mr. Turk, “The federal government faces a potentially toxic mix of constrained revenues, soaring expenditures, ballooning debt, and rising interest rates.” This is the real emergency that must be addressed in Washington, and the only solution is to reduce government spending substantially. If we don’t put the brakes on the spending spree soon, we may find ourselves facing another period of economic malaise that rivals the 1930s.

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How Government Debt Grows

by Ron Paul

Today our national debt stands at $8.2 trillion, which represents about $26,000 for every man, woman, and child in America. Interestingly, the legal debt limit is only $8.18 trillion, a figure that was reached a few weeks ago. This means the Treasury department must ask Congress to raise the debt limit very soon, most likely as part of a larger bill so it can be hidden from the American people. Raising the debt ceiling is nothing new. Congress raised it many times over the last 15 years, despite the supposed “surpluses” of the Clinton years.

Those single-year surpluses were based on accounting tricks that treated Social Security funds as general revenues. In reality the federal government ran deficits throughout the 1990s, and the federal debt rose steadily. Former Federal Reserve Chairman Alan Greenspan made it easier for Congress to obscure the extent of federal debt. He endorsed a change in the law that redefined Social Security and veterans pensions. In reality those obligations are debts, just like any other bill that must be paid in the future. But Mr. Greenspan urged renaming these obligations “intergovernment accounts,” which magically changed them from debts to “accrued liabilities.” This semantic shift frees up lots of room under the debt ceiling for more borrowing. Debt and credit, wisely used, can be proper tools for individuals and businesses.

In a free society, however, we can never view expansion as a proper goal for government. Unlike a private business, our federal government should not be seeking out new ways to increase the scope of its dubious “services.” Any government that consumes at least 25% of the American economy and still can’t balance its books is a government that vastly overspends. I disagree with the supply-side argument that government debt doesn’t matter. The issue is not whether the Treasury has sufficient current income to service the debt, but rather whether a government that spends so much ultimately will destroy its own economy. Debt does matter, especially to future generations that will be asked to pay for our extravagance. When government borrows money, the actual borrowers- big spending administrations and politicians- never have to pay it back. Remember, administrations come and go, members of congress become highly paid lobbyists, and bureaucrats retire with safe pensions. The benefits of deficit spending are enjoyed immediately by politicians, who trade pork for votes and enjoy adulation for promising to cure every social ill.

The bills always come due later, however. Nobody ever looks back and says, “Congressman so-and-so got us into this mess when he voted for all that spending 20 years ago.” For government, the federal budget is essentially a credit card with no spending limit, billed to somebody else. We hardly should be surprised that Congress racks up huge amounts of debt! By contrast, responsible people restrain their borrowing because they will have to pay the money back. It’s time for American taxpayers to understand that every dollar will have to be repaid. We should have the courage to face our grandchildren knowing that we have done all we can to end the government spending spree.

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