Wednesday, December 17, 2008

We make money the old-fashioned way ... we print it

So aside from the Federal Reserve giving away essentially free money, latest reports suggest that President-elect Barack Obama's team is contemplating an $850 Billion to $1 Trillion stimulus package in 2009-2010.

Tax increases on the wealthy to pay for it? Off the table, aides say.

Add this onto the $8.5 Trillion of non-existent money we've already spent, it raises the question ...

Just how far is our government willing to drive us into debt in order to stave off the inevitable?

I keep thinking about economist Paul Krugman's idea that individual virtue can become public vice.

Depending upon whether you accept the nominal or adjusted figures for Gross Domestic Product, the dollar value of our GDP varies between $12-14 Trillion annually.

That means that we've already borrowed--just in the last few months--55-65% of our annual GDP, and we're getting ready to increase that significantly--even assuming that Barack Obama is the smartest man in world history and can pull off all his other promises without spending another extra dime.

If the United States were an individual, what would credit counselors be telling her? I know the drill; my family went through it about a year ago.

It's simple, really.

1) Stop borrowing money.

2) Become aware of what you're spending, and why.

3) Cut your spending until you can live within your means, making the life-style changes necessary to do that.

4) Begin a pay-down program for your debt.

If you can't do all of items 1-4, consider bankruptcy.

Ah, but individual virtue can be public vice. We must be Keynesians now, the Nobel Prize winner tells us.

Ironically, many of Paul Krugman's fans point out that his Nobel Prize in Economics represents a repudiation of the Nobel Prize received by Libertarian Milton Friedman back in the hey-day of the Goldwater Legacy and the Reagan Revolution. They miss the point that, economics being what it is, Krugman is unlikely to be the last word in system economics, and--from an historical perspective--is likely to find another economist recognized with a Nobel Prize in 20 years or so for refuting him.

But Krugman is the golden boy now, and deficits don't matter. Stimulus spending is what matters. Defer the pain caused by decades of bad decisions by doing the thing that makes so much sense that we'd never let an individual do it: borrowing more money.

Here's one difference between nations and individuals that Paul Krugman seems to have missed: individuals usually cannot pass their personal debts down to the next generation; nations routinely do so.

Eventually, somebody (probably my children or yours) is going to have to either pay or repudiate our debt.

Or we could do the adult thing right now: take the hit and clean up our own mess.

Not likely.

Unfortunately, Barack Obama promised YES, we can, and Change You Can Believe In long before he discovered the full extent of what eight years of profligate GOP spending and Democrat enabling had done to our financial system. By the time the first bail-out came up, then-Senator Obama had already portrayed himself as such a major change agent that he couldn't have backed down without jeopardizing the election.

But the situation he's inherited is one so different, so massively different from what he expected, that there are no ready answers in the liberal/progressive ideological/policy playbook. And he's so far in the back pocket of the defense industry that he can't touch the Defense budget or the interventionist foreign policy that his predecessors have inflicted on the nation and the world.

I would be open to something new and imaginative here, even if it came from a completely different ideological perspective than my own.

Yet all that President-elect Obama has thus far offered (or been offered by his advisors) is strong dose of what doesn't seem to have worked all that well in the 1930s.

Leaving me with only one question: how do I tell my thirteen-year-old twins that the government has just borrowed not only their college education funds, the mortgages for their first houses, the loans for their first cars, and their retirement accounts?

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