American debt

[jim100]

http://dprogram.net/2011/08/28/economy-8-28-11/ An interesting theory on why the U.S is in debt. Your thoughts?

[seeknulfind]

I just skimmed the article but he's bought up some interesting points.

The analogy where a majority can accept two conflicting concepts deserves some consideration.

As I've said before, I've watched our nation sink lower and lower over 4 decades now and things only get worse.

Somehow I can't see how this trend is going to suddenly right itself.

Andy

[JGleason]

This country will never get out of debt until our government stops wasting money on such worthless causes as the war on drugs. That is just one of the many ways the government wastes money by the billions.

[gunderwood]

How am I to take this seriously when it starts out with this:

When I was growing up, finance was mother’s milk to me, especially as I was a bit of a math geek. But for my formal education, I was trained—rather rigorously, and in spite of my laziness—as a philosopher and a historian. This odd combination is why I have such a jaundiced view of economics: I don’t find economics particularly intimidating, or even particularly challenging—it’s just finance’s snooty but poor (and slightly daft) older cousin. History’s surprisingly ignorant and blinkered accountant. Philosophy and Math’s lightly retarded, Puritanically rigid, and altogether rather embarrassing spawn.

Now, it’s all good and fine for me to rant about how useless economics is—but these aren’t empty complaints on my part: I can point to a single, specific, monumental failing of economics—a failure in the discipline which pretty much proves my point:

The United States is going bankrupt—and economics cannot explain why.

Apparently the authors is not as well educated as he thinks? The current crop of bought out economists can't, but there are books on the subject which were written half a century ago. The Keynesian have their blinders on and every failure is just a sure sign that they needed to spend more. Spending yourself to wealth, brilliant.

Some schools of economic thought recognize that deficits are bad because they lead to bankruptcy, and that therefore fiscal budgets should be balanced so as to avoid them. But they do not explain why this is the case—they have no argument to explain why deficits happen in the first place. That these clever Austrians point to something that has happened before, and therefore infer that it will happen again if similar conditions are met is not an argument—it is an observation, like saying that the sun has risen countless times in the east, so it will likely rise again in the east tomorrow morning.

Yes, definitely not as well read as he would like you to believe. Mises dealt with this flawed attack on economics in his treaties Human Action. In fact, the title gives it away. Before you can use scientific reasoning and logic you must first prove that those tools can be correctly applied to the problem. One of the very first sections in Human Action (I don't have my copy on hand so I can't cite it now) is the epistemology of economics; aka the theory of knowledge as applied to economics.

It boils down to this. The reasons people do things vary wildly. Even two people presented with the same external stimuli will not make the same decision. Unlike the apple that fell on Newton's head, it's not repeatable. The scientific process requires that things be repeatable and measurable. If you perform an experiment and I perform the same experiment, we should get the same results (errors excluded). The problem is that people mess that up. Give me $25k today and I'd go buy a BMW HP2 Sport before the day was out. Give it to Rick and he probably wouldn't. Dealing with the human mind and why we make the decisions we do isn't economics, it's a variety of fields which includes psychology. The scientific process, logic (humans love to be illogical), etc. is of no use in that realm. I.e. the system under analysis violates the presuppositions of the tools.

Such were all the attacks against economics as a science and it's the first thing Mises had to deal with (aka economics isn't a real science). Thus, the title of his treaties: Human Action. Explaining why I would purchase a BMW HP2 Sport with the $25k you gave me and why Rick probably wouldn't isn't economics and isn't a valid use of scientific reasoning. However, explaining it once the action has been taken is. Epistemologically, economics can't explain why I value a rare motorcycle and Rick doesn't, it can explain what happens once we take that action though.

The same is true with the debt. It's not economics to discuss why people do the things they do, it is economics to discuss the outcomes of their actions. That's not to say investigating why people do the things they do isn't of value, but rather that it's a different field of study.


The discursive dilemma isn't new, all the author has done is propose it as the mechanism by which democracies always lead to bankruptcy.

Discursive dilemma or doctrinal paradox is a paradox in social choice theory which states that aggregating judgements with majority voting might result in a self-contradictory judgement.

This dilemma is really just the ignorance and/or irrationality of people:

You, me and Mary are in the middle of campaigning for our democracy’s budget for next year.

I am campaigning for the Balanced Budget Bill, which requires that our budget be balanced—and all three of us, wholeheartedly and without reservations, agree. So the Balanced Budget Bill sails through.

You are campaigning for the Lower Taxes Bill, which you obviously favor, and to which I also wholeheartedly agree. Therefore, the Lower Taxes Bill has a majority—and it too passes.

However, Mary is campaigning for the More Government Services Bill, to which which I also wholeheartedly agree, creating another majority—and it too passes.

You may say to me, “But your position is contradictory!” But I reply, “Certainly not!”

In fact, I did my civic duty: I listened to all the arguments, and I voted for all the bills. I think we should cut taxes—so when it came to a vote, I voted in favor of the Lower Taxes Bill, which passed. But I also want more government services—so when it came to a vote, I voted in favor of Mary’s More Government Service Bill, which also passed.

And all the while, I’m still in favor of my law, the Balanced Budget Bill, for which I voted.

Thus, as a group, we have an incoherent outcome: The majority of the group believes taxes should be cut—and at the same time, the majority of the group thinks the government should deliver more services to the people. All of the members of the group individually do not want a deficit, but as a group their incoherence leads to a deficit.

If any one person holds all three of those views they are usually contradictory as a whole. Economic analysis of the three would find that those actions are probably mutually exclusive. More government services requires money to pay for them; you can't also cut taxes and balance the budget unless the sum of the three is still true. Yes, democracy does tend to cause incoherent policies, but those policies can only exist for any period of time because of a fiat currency.

Governments with a fiat currency can operate this way because they don't have to confront the physical impossibility of paying out more hard currency than they actually have. If you go to pay your bills and you only have $357.06 in your account, the bank will object to you writing checks for more than that total. Governments avoid this with fiat currencies. When you can create something of "value" from nothing, such policies abound.

I think the poster is dead wrong when he says:

This is the democratic fiscal incoherence, a situation unique to democracies.

Dictatorships can have the same problem. People like being ignorant and illogical when it suits them. What the author should say is that democracies exacerbate the situation. Consider this:

Let's assume, as the author did, that one person holds all three values (taxes, services, and budget). It is possible to do all three, but only if the sum of them is less than or equal to the surplus. If you have a $300B surplus, you certainly can cut taxes $100B, increase services by $200B, and still balance the budget. There's nothing wrong with holding all three positions as long as their combined affect is less than the surplus. However, as I said, they are generally contradictory because governments and people rarely run a surplus; saving is admonishable exactly because it's the opposite of what we usually prefer to do. Economics can tell you if holding all three are reasonable or not, it can't tell you why you hold or don't hold all three positions.

The problem with democracy and the discursive dilemma isn't quite what the author makes it out to be. IMHO, the reason democracies are more susceptible to the dilemma is because you can get a majority vote without any particular person being irrational. The author almost gets it, but misses the point of the dilemma and democracy. Consider a theoretical democracy with 9 members.

It's entirely possible and reasonable that 4 of those members want to balance the budget and cut taxes. As long as there is a surplus, economics says it's rational to do so. It's also entirely possible that 4 different members want to increase government services and balance the budget. Again, as long as there is a surplus it's rational to hold both positions. However, all it takes is for the last person in this democracy to not care about budget, act like a child, and hold the position that we should cut taxes and increase government services to create an inconsistent policy. A majority now exists which will pass all three bills regardless if it's economically rational or not.

I say act like a child because that's what it is; it's avoiding reality. A balanced budget isn't a position, it's a long term reality. Yes, you can violate it for a period of time, but in the long run reality wins every time. Government or individual, both go bankrupt when they ignore that reality. In order to be sustainable you must on average spend less than or equal too what you take in. We all take loans to pay for things like a house, but our intention is to pay it back and actually own the house.

The difference between an individual and a democracy is this. When an individual does it it's irrational to hold all those positions (with the one exception noted above). However, in a democracy, it can happen with only a single person being irrational. The majority can have a coherent policy, but that single idiot screws everything up and makes the policy as a whole irrational.

[m4a1mustang]

Guys, don't worry. We can just raise the debt limit.

[wylde007]

Amurka is in debt because Amurka has been in a constant state of war for 150 years. First they waged war on the South.

Then they waged war on anybody else they saw fit. And we have paid the price in lives, material, interest on loans... and seeing our rights whittled away.

[CCFan]

As with all paradoxes, an example is the easiest way to understand it—so here’s one:

Suppose there are three of us—you, me and Mary—standing around in the kitchen. Suppose that you and I believe that p is true, while Mary is sure down to her very bones that p is most definitely not true.

Mary is just one person—you and I are two. Therefore, a majority of this group believes p is true.

As I said, Mary doesn’t believe for a second that p is true—instead, she argues very convincingly that r is true. For the purposes of this example, p is completely incompatible with r; not contradictory—rather, incompatible: Symbolically, ¬(p ⋏ r).

Since Mary believes r is true, and p and r are incompatible, you therefore fervently argue with Mary about why r is most definitely not true—if r is true, then p cannot be the case. And you believe that p.

But as I listen to Mary, I come to the conclusion that r might well be true. I don’t believe that p and r are both true—because they are incompatible. I simply believe that r might be the case.

Therefore, a majority of this group believes r is true.

Which allows us to arrive at our paradox: A majority of the group believes p is true, a majority believe that r is true—but none of us as individuals believes that both p and r are true, because as I said before, p and r are incompatible.

However, as a democratic group, we believe that p and r are both true—which is incoherent.

This is the discursive dilemma.

The paradox is the part where he left out that if you take that p and r are incompatible, that the incompatibility cannot be explained away, and that P != R, then if he changes his mind and believes "r 'might' be the case", then you cannot posit that R might be the case without inferring that P might not be the case.

Take a coin. Flip it, catch it in your hand, and turn it over. Heads and Tails are incompatible. If you think it's heads, I think it's heads, and your friend Joe (or Joanne) thinks it's tails, a majority thinks it's heads. If I begin to think "It could be tails", then, by his argument, since tails is incompatible with heads, I have to make a decision that "it may not be heads" - if I make that decision, then a majority no longer believes it's heads.

Lame argument on his part.

We're in this mess because people aren't held accountable, any talk of holding anyone accountable is nothing more than lip service, and serious talk of holding anyone's feet to the fire instantly results in one being a racist, anarchist, militant, or any number of other titles designed to draw the attention away from the point you raised. At least that's my take on it.

[JayDT]

The debt is rising because politicians (Dems & Repubs) can buy votes with OUR money. Just look at our current administration. $1.7 Trillion budgetted OVER the expected revenues. The deficit has always been a spending problem, not a revenue problem.
The entitlements (Social Security, Medicare and Medicaid) use up most (if not all) of our revenue. Congress won't cut back on these programs because of voters. We now have a situation where 50% of the residents of the USA don't pay ANY federal income taxes. They will continue to vote for those pols that keep their welfare coming.
Check out FairTax.org for a solution.

[wylde007]

Congress SHOULD NOT cut back those programs because they are the ones we actually paid into. We are "entitled" to them because they steal (excuse me "withhold") money from each and every one of our paychecks.

[ThereIsNoSpoon]

OK. First of all we are not a Democracy. I suppose we are at the congressional level, so I will concede that to the author.

The author conceded that the U.S. did very well managing its debt until 1975. So I don't think that being a Democracy/Republic necessarily sets you onto the road to default.

The reason we are in debt is because we are a debt based economy. Every dollar in our pockets and bank accounts originates from a loan of some sort. If the U.S. decides to start paying off the national debt we will experience deflation proportional to the debt payed off. If we woke up tomorrow and just payed off the debt right there, we would have extinguished the money supply with interest left over that we have no money to pay it with.

Talking about getting out of debt is a ridiculous endeavor without first reforming our monetary system to get away from a debt based economy.

And it doesn't matter whether it's Commodities based or Fiat. The only thing that matters is how the money gets into circulation. You either spend it in or you loan it in. Spend it in - no debt. Loan it in - you have debt.

Hard Asset vs Fiat is a discussion for another thread anyway and I don't want to get into it.

[ThereIsNoSpoon]

Bump

[jim100]

OK. First of all we are not a Democracy. I suppose we are at the congressional level, so I will concede that to the author.

The author conceded that the U.S. did very well managing its debt until 1975. So I don't think that being a Democracy/Republic necessarily sets you onto the road to default.

The reason we are in debt is because we are a debt based economy. Every dollar in our pockets and bank accounts originates from a loan of some sort. If the U.S. decides to start paying off the national debt we will experience deflation proportional to the debt payed off. If we woke up tomorrow and just payed off the debt right there, we would have extinguished the money supply with interest left over that we have no money to pay it with.

Talking about getting out of debt is a ridiculous endeavor without first reforming our monetary system to get away from a debt based economy.

And it doesn't matter whether it's Commodities based or Fiat. The only thing that matters is how the money gets into circulation. You either spend it in or you loan it in. Spend it in - no debt. Loan it in - you have debt.

Hard Asset vs Fiat is a discussion for another thread anyway and I don't want to get into it.

+1

[gunderwood]

OK. First of all we are not a Democracy. I suppose we are at the congressional level, so I will concede that to the author.

The author conceded that the U.S. did very well managing its debt until 1975. So I don't think that being a Democracy/Republic necessarily sets you onto the road to default.

The reason we are in debt is because we are a debt based economy. Every dollar in our pockets and bank accounts originates from a loan of some sort. If the U.S. decides to start paying off the national debt we will experience deflation proportional to the debt payed off. If we woke up tomorrow and just payed off the debt right there, we would have extinguished the money supply with interest left over that we have no money to pay it with.

Talking about getting out of debt is a ridiculous endeavor without first reforming our monetary system to get away from a debt based economy.

And it doesn't matter whether it's Commodities based or Fiat. The only thing that matters is how the money gets into circulation. You either spend it in or you loan it in. Spend it in - no debt. Loan it in - you have debt.

Hard Asset vs Fiat is a discussion for another thread anyway and I don't want to get into it.

Agree to an extent, but try telling the government they can't print more fiat currency. That's one of the big benefits of a hard currency, it's a lot hard to create more of it. Interesting that the stagflation of the 70s and the debt go hand in hand with us officially going off the gold/silver standard.