A Triumph for Tyranny

Introduction

In 1831 Alexis de Tocqueville, along with his companion Gustave de Beaumont, traveled from France to the United States for — ironically — studying the U.S. prison system. Democracy in America, the book in which he recorded his observations from his nine-month tour, has provided background for many discussions about democracy even to this day.

In Democracy in America, de Tocqueville raises the possibility of a tyranny of the majority under democratic forms of government. Although he saw a risk of that form of tyranny in the U.S., he also observed elements of the Republic structure of the United States government that might mitigate the tyranny of the majority. In fact, he entitled one of his chapters “Causes Which Mitigate the Tyranny of the Majority in the United States.”

Over the years, and particularly in the 20th century, the U.S. Government — abetted by its citizens — has swept aside the protections against the tyranny spawned by democratic forms of government. The concerns expressed by Alexis de Tocqueville and the fears of many of the founding fathers have come to pass in ways they could only imagine. We have created the tyranny of the majority of the minority over the population.

I have chosen “healthcare” legislation as an outstanding example.

Healthcare Tyranny

In 2009, with a vote on The Affordable Care Act (Obamacare), the U.S. Government Congress enacted another triumph for tyranny. Two hundred nineteen people (in essence only eight people), not even elected by most citizens, place further limits on the liberty of over 300,000,000 Americans. In the original version, they had the audacity to force people to take actions they would not have chosen on their own.

I don’t see this as an issue of Democrats versus Republicans. Both parties believe in more oppression—they want to control the lives of other people. We just got the Democrat form of oppression rather than the Republican form. I favor neither.

Contrary to popular misconception, the United States of America does not need “healthcare” reform of any sort. It requires, instead, the repeal of all existing legislation that hampers the emergence of a free market in all forms of care for the sick and needy.

To those who argue that a free-market will not care for those people I have two from responses:

First, you cannot provide any empirical evidence to support your claim. A free market for these services — or any other for that matter — has never existed in this country. Without the interference of the federal government, American citizens have traditionally stepped forward to help those in need voluntarily.

Second, in a free market, both parties win in every voluntary transaction, for every product/service. In every government controlled market, the monopoly force of government picks winners and losers. In such a system — in which winners pick the pockets of losers — we all lose in the long run. These statements apply to “healthcare” as much as any other service.

If you favor any form of legislation regarding “healthcare,” you don’t favor liberty or economic efficiency. You favor the freedom of getting what you want and the freedom of others to get what you want them to get. You favor a misguided view of economic efficiency that practices stealing from healthier and more productive people to support less healthy and less productive people. These forms of freedom and economic efficiency will eventually make you less free, less healthy, and less productive.

Conclusion

Cloaked in altruism, tyranny and oppression in the U.S. of America takes on a particularly sinister character. It creates the unseen tyranny of one citizen over another. The atrocious legislation, known as “Obamacare,” provides only one example of the many and more frequent examples of tyranny within a “democratic” form of government. Many other examples, both real and proposed, of the tyranny of the majority exist.

Minimum wage laws, consumer “protection” laws, labor laws, etc., all provide living examples of a minority of representatives restricting the freedom of all citizens. Little hope exists in the trend of this legislative tyranny. Now, many legislators — and citizens — actually support the horrendously to hear radical proposal referred to as The Green New Deal.

Don’t enslave your neighbor; set him free.

Climate, Freedom, & Money

Introduction

“Climate change” represents the crisis de jure. We have no choice but to accept that human activity has created a crisis level of change in the climate of the world. To deal with this crisis, we must implement an unprecedented level of government intervention.

The complexity of this subject boggles the mind. How do we determine the validity of this problem, and what to do about it? To reduce the complexity, I will address only a couple of questions I have about this “problem” and the proposed intervention.

The Problem

Consensus

One reason people give for why we should believe in this crisis: 97% of scientists agree on calamitous findings regarding climate change.

Now I don’t have any certified credentials in science. I do, however, know enough to know that real scientists pride themselves on believing in the principle of non-confirmation. They do not believe in “settled” science. Even as a layman I know we cannot determine facts by popular vote. Those who believe otherwise must not have heard of Einstein, Copernicus, etc. Need I continue?

Carbon Poison

I have some important questions about carbon. Much of what I hear does not make any sense to me.

Believers in the impending climate crisis want to reduce the amount of CO2 created by human activity. They talk as if CO2 were a poison. Does that make sense?

I remember from high school biology that CO2 provides a food source for plants. Without enough CO2, plants would die. Without plants, we would die.

I admit my years in high school occurred a really long time ago. Maybe new technology has found a poisonous property in CO2. But, don’t people who run greenhouses add CO2 to the air inside?

Does it make sense to reduce our production of plant food?

The people who believe in the risk of climate change all think the solution will require some form of economic intervention. These interventions consist of everything from taxes on the use of carbon-based fuels to complete government take over of the economy.

Before I discuss the proposed interventions, I would like to make a general review of some of our current interventions. That might give us a clue as to the most effective interventions for the future.

Existing Intervention

I will reflect on the three categories of interventions: 1) monetary policy, 2) spending, and 3) regulation.

Money

Expanding the money supply has become one of politicians favorite ways to meddle with the economy. It’s stealthy—few people notice it. It taxes citizens without the painful process of passing tax legislation. It’s easy. But it has consequences.

Artificial monetary expansion distorts price signals. This misinformation leads people to misallocate resources. People spend money on goods they cannot afford. Investors acquire producer goods they do not need.

Monetary expansion leads to inefficient burning of carbon fuels.

Spending

Government officials have adopted the euphemism “spending” for a broad range of redistributions. In general, government redistributes resources from producers to consumers. “Spending” leads to less effective, efficient use of resources.

Government “spending” leads to more use of carbon fuels than would occur without redistribution.

Regulation

Regulation forces segments of the population to engage in activities which they would not otherwise choose. They must consume resources they would not consume if left to their own choices.

Similar to spending, regulation leads to the use of more carbon fuels than would have occurred without such regulation.

Proposed Intervention

Instead of examining the current political environment, the people with deep-seated concern about climate change propose additional government intervention. I will discuss those in the reverse order.

Regulation

Instead of trusting people to clean up their personal environments, politicians, as usual, think they can achieve a better result by forcing people to change their behavior. As a result, people will engage in behaviors in which they would not otherwise engage. In doing so, they will either follow the regulations or figure a way to work around the rules.

Spending

Politicians recommend massive spending programs in order to “clean up the environment.” Somehow, magically, they think they can do that without consuming additional resources or burning additional fossil fuels.

They have not learned that the redistribution of resources by government spending always leads to less efficient use of resources.

Money

When asked how they plan to pay for it, the people promoting green projects say that should not be a problem. That amounts to code for “we’ll just have the government print money.”

This attitude indicates they have not come to grips with the connection between monetary expansion and the wasteful boom and bust cycles in the economy. The malinvestments created as a result of monetary expansion create far more pollution than actors in a free-market would create on their own.

A Solution

Examine the Science

People making disastrous predictions regarding climate change should first go back and re-examine their science. Who knows; they might be correct. But, as long as one dissenting voice exists — and there are many — the science requires re-examination.

Answer, for example, the question I posed at the beginning of this article. Why do we consider carbon dioxide (a food for life) as a poison that could kill us?

Rollback Regulation, Spending, and Monetary Expansion

Instead of adding new interventions to the already ineffective interventions, rollback those that are already contributing to the ineffective use of resources and the excessive consumption of carbon fuels.

Conclusion

When you take a close look at the people promoting “Green New Deals” and Paris Accords, you realize that the majority of them either have political power or seek political power. Whether the people advocating these programs have the science correct or not, should we allow them to take further control of our lives?

This environmental scare, when you pull back the curtain, amounts to a great power grab, whether you agree with their desired results or not.

 

The Politics of Socialism

Even if you’re willing to ignore the economic costs, socialism brings a political cost most people — particularly in America — would find unacceptable. Socialism eventually leads to the loss of liberty and tyranny.

In previous posts, I’ve explained the impracticality of socialism as an economic system. We cannot deliver full value to workers when we don’t know the price of the final products, and we can’t separate the contribution of labor versus the contribution of capital. Although I want to focus primarily on economics in this blog, socialism causes a political price that I don’t think most people would be willing to pay.

Central Planning

Having workers own the means of production sounds like a wonderful program. But, have you ever experienced large groups making decisions? When groups get together and try to make decisions in unison, they tend to be impractical and ineffective. The larger the group, the worse the results achieved. So, imagine a nationwide economy depending on all the owners of production making decisions in unison.

Even ardent socialists agree with this picture. They know that having all the members of society deciding together how resources get distributed simply would not work. Socialism, therefore, requires central planning. When initially presented the idea of “central planning” seems quite reasonable and harmless. Why not let the representatives of the workers decide how does distribute resources and work?

Was it Lord Acton who pointed out the problem of corruption that arises from power? Whether the attribution is correct, the observation certainly is. Central planners would discover the benefit of having the power given to them, and they would do their best to increase that power. The end result would be something we’ve seen in most, if not all, socialist countries: absolute tyranny.

But couldn’t this be avoided with a democratic form of government and a socialist economy?

Democratic Socialism

Democracy, as pointed out by Alexis de Tocqueville and Hans Herman Hoppe, has its own set of problems. But, even in the idealized form of democracy, the socialism part of Democratic Socialism would drag the system down.

In the economic system known as socialism the countervailing power of open markets does not exist. Elected officials would have far more power than they would under a democratic government and a market economic system. Since those who have power tend to strive for more, the system would ultimately break down, and some form of tyranny would arise. Look, for example, at the “democratically” elected president of Venezuela. Not working too well.

Socialism, even under a democratically elected form of government, would eventually lead to lost liberty.

Lost Liberty

The Lurking Threat of Socialism

Regardless of the form of government socialism will always lead to a loss of liberty. In the abstract, that may not seem too bad. Most people would give up a certain amount of liberty in exchange for a bit more certainty on the economic front. Who wouldn’t prefer to have education, healthcare, retirement, and other essential economic concerns guaranteed by someone else?

At a more personal level, however, lost liberty would mean, particularly for Americans, the loss of a reasonable lifestyle. How would you like to have someone else to decide what you do for work, where you go to school, what you eat, whether you eat, where you live, who you associate with, and anything else that you control through your own free choice?

Free stuff comes at an extremely high price.

Conclusion

Socialism represents such an outrageously impractical economic system it seems incredible that anyone would suggest it in the first place. But, even in an idealized form, socialism comes at a price that includes a lot more than the loss of economic well-being.

Under any political system, socialism robs you of free choice and your very humanity.

Serious consideration of socialism represents a far greater threat to humanity than climate change, volcanoes, asteroids, or any other natural disaster. For the sake of your economic well being and your personal liberty, reject the concept now.

 

National Debt Burden

Pundits, inside and outside of government, make a big deal out of the problems of national debt. Before you understand the problem of national debt you must understand the truth behind what they say about national debt.

Having the federal government borrow money to finance its operation does not really amount to the large problem some people believe. The real problem consists of the misallocation of resources caused by government “spending.” Government borrowing simply provides another way of financing the misallocation. The real risk from government debt comes from the effect that it has on financial markets, not the impact that it has on the economy.

Who Really Pays

Many people claim that national debt creates a burden for “our children.” As long as we have a progressive tax system, “our children” will never bear a large portion of the current tax burden nor will they bear the burden of government debt.

When the time comes to pay national debt — if that ever occurs — it will be the children of rich people, or new rich people, who bear that burden. We can’t understand how big a problem national debt will cause until we understand exactly who pays it and what happens to the money in the interim.

Occasionally a person will claim that government debt does not represent a problem because we “owe the money to ourselves.” The problem, as I mentioned in my opening, does not consist of who owes money to whom but the deleterious effect of resource allocation through government “spending.”

Government finance consists of a very complex subject. A person can never achieve a real understanding of the problems and its ramifications.

Walk with me through three diagrams that I hope will give you a handle on why government debt by itself does not represent a large problem.

Government Finance Without Borrowing

The diagram below represents a very simple model of how government finance should work. In order to pay for its outlays government must collect taxes. In this example, they collect an equal amount from Taxpayers A and B, and they collect next to nothing from Taxpayers C. Those taxes represent the bulk of government receipts with which it pays its outlays. (To simplify this model, I have left out other forms of government revenue — park fees, license fees, etc.)

Also, forgive me for using the word “outlays” instead of the commonly used word “spending.” For me the word “spending” connotes exchanging something for value. Most of what government calls “spending” consists of redistribution; so, it doesn’t deserve to be described as “spending.”

Machine generated alternative text: Taxpayers A Taxpayers C Go vernm ent Taxes Taxpay ers B G overnment Outlays Outlays Beget Taxation Government Rec eipts

You can see from this very simple example that government taxes finance all government outlays. For the purpose of these examples, I make no argument about the validity or you effectiveness of the government outlays.

In the next model I will show how government uses borrowing to finance some of its outlays.

Government Finance Including Borrowing

Government must always receive enough money to equal its outlays. When it doesn’t receive enough in tax revenues, it must borrow the balance. The diagram below depicts that process in a relatively simple form.

As in the previous diagram Taxpayers A and B split nearly the entire tax burden between the two groups, and Taxpayers C contribute next to nothing. In this case, however, Taxpayers A and B play different roles. Taxpayers A, mostly entrepreneurs, invest most of their income into various investments. Taxpayers B invest most of their money in government bonds.

Thus, Taxpayers B provide all the money the government borrows. This allows Taxpayers A to delay their tax burden for an undetermined time. Because of this tax deferral, Taxpayers A have more money to reinvest than they would have if government had collected enough tax revenue from A and B to cover its outlays.

This process has the effect of temporarily transferring the liability of Taxpayers A to Taxpayers B. Does this mean that the children of Taxpayers A face an additional tax burden in the future? Yes. But, some benefits accrue to the errors of Taxpayers A. Government acts, in effect, as an intermediary for a low interest loan from B to A.

I will attempt to demonstrate this in hypothetical example below.

The Real Effects of Government Borrowing

The diagram below represents a hypothetical situation in which, instead of lending money to the government, Taxpayers be lend the same amount of money directly to Taxpayers A — with a guarantee from the government.

This diagram, of course, does not represent how government financing actually works, but it does represent the real effects of government borrowing.

Machine generated alternative text: Government D ebt repayment Outlays Taxpayers C Government Taxes Outlays beget Taxation Taxpayers A Taxpayers B Taxpayer A's Debt Taxpayers A B orrow Government Rec eipts

[I think you can see that I could’ve made a simpler diagram. I left this diagram in the same format as the previous diagram so you could see the effects of simply substituting “Taxpayers A Borrow” for “Government Borrows.”]

In this case, Taxpayers A receive what amounts to a low interest loan from the Taxpayers B, at a preferred interest rate. Of course, Taxpayers A will eventually need to repay the debt, but, in the interim, they receive a return on the money they don’t pay in taxes and can invest.

If the financing arrangement were done according to this hypothetical example, no one would complain about the burden imposed on future generations. People see a big problem, however, if when government achieves the same results by doing the borrowing itself.

Foreign Lenders

I have not discussed the influence of foreign lenders to our government. That process can become very complicated depending on how foreign banks deal with that money. If, for example, they expand their own money supply in order to acquire US dollars, that will hold down the price of US imports giving a benefit to US consumers, and causing inflation in their own country.

Investment Risk

So, why should we consider government debt a problem?

The biggest risk of massive government debt arises in the financial markets. When government debt rises to the point where investors doubt that the government can raise enough tax revenue, the price of those bonds will decline significantly causing disruption to financial markets. That disruption can feedback into the “real” economy.

Conclusion

I have attempted to explain a very complex issue with a few words and diagrams. But, above all else, I want you to comprehend that complexity.

When someone tells you that the rising federal debt represents a huge problem, and a huge burden for “our children,” remember the complexity of the process. Don’t consider the results all good, all bad, are all benign. You need to know who’s paying the taxes, who’s getting a tax deferral as a result of government borrowing, what they’re doing with that deferred tax revenue, and what effects it has outside this simple example.

The real problems arise from the redistribution resulting from government “spending.”

Healthcare Economics

Government involvement in “healthcare” provides startling example of an incredible waste of resources that no one seems to notice. It shows how a current benefit causes a long-term drag on the economy.

In my last post I pointed out how a vote for government amounts to a vote for economic inefficiency.

In this post I will point out some important questions regarding a specific intervention of government in the market — the intervention in “healthcare.”

The complexity of this subject precludes me from covering it in any detail. I would simply like to point out some of the issues that people seem to ignore when dealing with the subject.

Terminology

How can we discuss the subject intelligently without using accurate terminology?

We have for years used the euphemistic term “healthcare” to refer to what should more accurately be referred to as “sickness-care.” In common usage, people normally use the term healthcare to refer to prescription drugs, hospital stays, vaccinations, etc. These topics, however, have a great deal to do with sickness and very little to do with health.

Most people also seem to deny that this sickness-care is a product or service that should have a normal market price. Some people claim that they have a right to healthcare. By some magical activity it should be given to them with no cost. They don’t seem to understand that healthcare consists of a service like many other services—not much different from the service of a plumber or an auto mechanic. Natural law gives you the right to life. It does not give you the right to health; that’s up to you.

To prevent confusion on your part I will continue to refer to sickness-care as healthcare. I don’t want you tripping over too many new concepts all at once.

Prices-Costs

Price plays an important role in the allocation of all resources—even those used in a service like healthcare. But, what mechanism tells bureaucrats what to pay providers for medical treatment services? They have no way to effectively and efficiently allocate resources to such a valuable service because they have no price mechanism to observe. If they want a resource, they give up nothing to get it—unlike a consumer would.

The willingness of people to pay for healthcare should determine the price of medical care in the same way that people’s willingness to pay for gasoline determines its price. How much do you value your own health? What sacrifice would you make to maintain good health?

The government does not — indeed cannot — know the answers to these questions. And, providing the service free, or cheap, creates another set of problems.

Demand

Economists don’t agree on very much, but they nearly universally agree that providing a good for free, or cheap, leads to more demand.

More demand almost always leads to higher prices for the entity paying the bills. When government takes on the role of providing any service for people, the price, ultimately paid by taxpayers, tends to rise. Look at the many activities in which government intervenes e.g. schools, union wages, postal service, real estate, etc. The prices rise faster than the rest of the market. The same thing happens to the cost of healthcare.

With free healthcare people tend to have more doctor visits, more visits to the ER, and more demand for prescription drugs. Since government does not know the value of any of these services, they have no way of knowing how much to provide nor at what cost.

Allocation

Ever-growing demand with the lack of an effective pricing mechanism leads to an inefficient allocation of medical resources. As with most government activities, providing healthcare amounts to a redistribution from the healthy and productive to the sick and less productive. This redistribution causes a drag on rest of the economy that affects all consumers. Without these pricing mechanisms, how can bureaucrats know who should get what treatment and when?

This principle—mis-allocation due to lack of price signals—applies particularly to what has become a political talking point: pre-existing conditions. Who defines the meaning of pre-existing conditions and determines who has them? Then, who pays for the treatment of those pre-existing conditions. As indicated above the healthy and more productive people pay for the sick and less productive.

The resources taken involuntarily from productive activities actually create a negative feedback for the sick themselves. The long-term source of the philanthropic support of those with serious conditions gets diminished by current taxation and transfers to the ill.

Enough resources do exist to help those who really need long-term financial assistance for their medical needs. Individuals, however, not the government should decide from where those resources come. The government, by confiscating people’s resources, insult the voluntary kindness of people and their willingness to help people in need. People with pre-existing conditions would not die in the streets without government stealing on their behalf.

Conclusion

Healthcare, like any other service, should be left to the participants in the market. Consumers should decide how much they value their own health, and generous individuals can and will help who need long-term medical care.

Government intervention in healthcare leads to at least three detrimental outcomes:

  • Higher costs—paid by tax payers.
  • Misallocation of resources—robbing more productive people.
  • A general drag on the economy—costing the healthy and sick alike.

Will legislators ever have the political courage to take the right and effective action and get government entirely out of the business of providing healthcare?

 

Election Day

Your vote today supports theft, tyranny, and disaster.

When you cast your vote today, think about what you have really done. You have really abdicated your responsibility for your life, liberty, and happiness, in favor of authorizing theft, tyranny, and disaster. You probably feel like you’ve done the responsible thing. Your friends, family, the Hollywood elite, and the news media, all tell you so. But you need to use language that accurately describes the economic result of a vote in what people erroneously refer to as a democracy.

When political power overruns an economic system, voters should describe it in language that accurately describes what voters have done.

Theft

Voters have been led to believe that they do the right thing for our citizens when they vote for a system that offers healthcare, Social Security, welfare, and infrastructure. These all seem like things from which citizens can benefit. This may be true, but voters need to consider what they give up for these benefits.

Government “spending” creates a mis-allocation of precious resources. Government does not bear the cost of its “spending,” as do individual consumers. It engages in theft, which we refer to as taxation, in order to redistribute other people’s resources.

Would you steal from your neighbor in order to pay for something you want? Then why authorize politicians to steal in your name — even for a good cause?

Tyranny

Most of us want to improve public safety, assure that citizens deal with each other fairly, protect public health, and protect the environment. But, do political means implement the best processes to achieve these objectives?

What we refer to as “regulations” really amount to tyranny and oppression. Voters engage the monopoly force of government to restrict the behavior of other people. They violate the rights of citizens by restricting their use of their own property.

Disaster

Most citizens desire a healthy and growing economy — one that supports sufficient jobs and income for people to live comfortably. They have grown to believe that rising prices are a sign of a healthy and growing economy. If the banking system must expand the money supply to accomplish this objective, voters do not object.

Economists and politicians refer to monetary expansion as a form of economic stimulus. Monetary expansion, however, disrupts the market’s healthy pricing mechanism. The misinformation created causes artificial booms, which invariably lead to economic disaster. Along the way many of the rich get richer — but not in a healthy way. They don’t make more money by providing more and better products for consumers, they do so in trading with the artificially expanded money supply.

Conclusion

Whatever your political philosophy, voting supports the economics of oppression. It legitimizes the system in which the monopoly power of government intervenes in the normally efficient operation of markets.

  • Government engages in theft in order to redistribute resources according to the preferences of politicians.
  • Government engages in tyranny by influencing people’s behavior through the threat of violent force.
  • Government sets up the economy for future disaster through artificial stimulation resulting from the expansion of the money supply.

Election day provides an opportunity for you to consider the negative influences of the political means on your economic well-being. The words theft, tyranny, and disaster evoke a different emotional response than the terms spending, regulation, and stimulus. But, shouldn’t voters use words that more accurately describe for what they’re vote.

Take the opportunity to learn why markets unfettered by violent intervention—Free Markets—will always provide more effective and efficient allocation of resources.

Free markets bear a similarity to life — difficult; but rewarding.

 

Federal Fiance Made Easy

It never ceases to amaze me how people misunderstand the process of financing the federal government. The ridiculous economic stimulus programs that the government frequently adopts provide just one example.

I thought that a simple explanation of the dynamics of government finance would help readers understand how this system works.

How the Government Spends Money

To understand government finance, you must first understand the meaning of what people generally refer to as government “spending.” Although I do use the word occasionally, I try to avoid “spending” when referring to the money government disburses. Spending implies voluntary exchanges of earned resources (or money) for goods and services. Governments do not earn money. We’ll see how they get it in a moment.

Despite the laundry list of programs that get money from the government, those programs fall into three general categories of disbursements: 1) transfer payments; 2) acquisitions; and 3) debt payments. This diagram depicts those general categories of disbursements from the Federal Government to the National Economy.

Transfer payments

As the term implies, transfer payments simply transfer money to individuals, who belong to some specific group or category of citizens (or even non-citizens). Examples of transfer payments include: Social Security, Medicare, Welfare Payments, and Economic Stimulus Payments. The government receives nothing in return for these payments.

Acquisitions

Acquisitions include all disbursements made in return for products and services. Unlike transfer payments the government gets something for the money it disburses. Examples of acquisitions include: Defense, Highways, Buildings, and Salaries for Legislators and bureaucrats.

Debt Payment

Debt payment includes all payments made on federal debt obligations. This includes principal and interest.

As many categories as the people in government invent, and as many hearings and debates the legislators have, the “spending” side of federal finance boils down to these three categories: money given away (transfer payments), money to buy stuff (acquisitions), and money to pay debt obligations (debt payments).

That, however, does not provide a complete picture. Every dollar that government disburses must come from somewhere. Government has no money of its own. And, it earns no money.

So, where does government get the money it disburses?

How the Government Gets Money

Coincidently and conveniently it comes from three sources. I have completed the diagram of government finance to show those sources of money: 1) taxes, 2) inflation, and 3) borrowing.

Taxes

Taxes—all forms of federal taxes—provide the primary source of money for the disbursements described above. (I have included fees with taxes because the market does not determine these fees.)

No matter how nicely you phrase it taxation amounts to the use of the coercive power of the government to take people’s private property. Plunder, thievery, and taxation all provide accurate names for this source of government money.

Borrowing

The nature and effect of government borrowing seems to confuse people. Most explanations of government borrowing tend to complicate the subject beyond comprehension.

First, why does government borrowing occur?

As depicted in the diagram, the government must have a source for every dollar it disburses. Taxes provide the money for most of those disbursements, but when the government spends more money than it collects in taxes it must borrow to cover the deficit.

Second, what effect does borrowing have on the national economy?

In simple terms, borrowing has only a slightly different effect than does taxation. It takes money, which has other uses, from the national economy. Just as with taxation, when the government borrows money from the economy, that money gets used as government authorities dictate, without the benefit of a pricing mechanism. That money is no longer available for any other purpose for which the free market might have used it.

Third, what secures government borrowing? Or, what provides assurance of repayment to lenders?

People don’t lend money without the expectation of getting paid back. When people lend money to a government they rely on the government’s ability to tax in order to repay those loans. The security for government debt comes from its ability to tax.

(I don’t have the space to elaborate here, but don’t get confused by people who talk about “borrowing against our kids’ future.” First, money borrowed by government gets redistributed in the economy today—not in the future, just like taxes. Second, when government makes debt payments in the future, government redistributes that money in the economy at that same time in the future. The government makes a transfer today. The government makes a transfer in the future. In addition, the “wealthy” lend money to the government; the “wealthy” pay taxes to repay that debt—not “our kids.)

Inflation

With the aid of the banking system, the government can create new money to “pay its bills.” The Government likes this method for “collecting” revenue for several reasons: it can do it unilaterally (with the assistance of banks), without people noticing, and people don’t feel the pain immediately.

I have described inflation as a receipt like the other sources of revenue because inflation takes value away from people in the economy—just as taxation does. When the banking system creates new money—from nothing—the value of money already in existence declines. But, the decline in value does not affect everyone uniformly. Those who get this new money first benefit; those who get it later suffer. Just like counterfeiting.

Although the banking system has the power to create money for any purpose, it frequently creates it to buy federal debt—frequently referred to as monetizing federal debt. That does not change the effect of inflation: transferring value from on group of people to another group.

(Because of the complexity of the concept of inflation, I will address it in more detail in future posts.)

The Books Must Balance

For every dollar the government disburses it must receive a dollar from somewhere. Disbursements and receipts must always equal. Simple. Keep this in mind whenever reading or hearing about government finances.

When your legislators propose wonderful sounding programs (e.g. healthcare, museums, homeland security, or economic stimulus) they must tax, borrow, or inflate to get that money. They cannot give you anything for free.

Similarly, when they propose tax cuts without equivalent spending cuts, don’t let that fool you. They must borrow or inflate to make up the difference.

This system looks rather benign. Doesn’t the government put back into the economy every dollar it takes out?

Yes, it does. However…

A Flaw in the Model

That last question exposes the flaw with the model I have presented here. The homogeneous entity that we refer to as “National Economy” simply does not exist. The economy actually exists as an interconnected, yet heterogeneous, collection of individual people and businesses.

Transfer payments, acquisitions, and debt payments do not go to everyone equally. The government makes those disbursements to specific people or organizations—based on the whim of legislators, not the desires of market participants.

Taxes, borrowing, and inflation do not come from individual people and businesses uniformly. Specific people or organizations pay taxes, lend money, or suffer from the effects of inflation.

The Wealth Redistribution Machine

In summary, the federal government acts as a gigantic wealth redistribution machine. In the aggregate, the government gives a dollar for every dollar it takes. The economy, however, does not operate as an aggregate. So, for every dollar the government gives to one group of individuals it must take a dollar from another group of individuals.

Government finance simply amounts to involuntary, coerced, exchange.