Fac­tor­ing in the fu­ture

The Washington Times Weekly - - Commentary -

On Feb. 24 in Pres­i­dent Obama’s ad­dress to the joint houses of Congress, he said we should not im­pose a debt on the next gen­er­a­tion it can­not pay. As the fa­ther of three girls I found my­self ap­plaud­ing that state­ment.

Yet there are un­de­ni­able facts that go be­yond florid rhetoric. Al­though Mark Twain once noted, “There are lies, damn lies and statis­tics,” there are statis­tics worth not­ing in the con­text of present con­di­tions.

To meet the de­mands im­posed by the so-called stim­u­lus bill, we the Amer­i­can peo­ple must bor­row. And, as any debtor knows, there are two costs to bor­row­ing — fi­nanc­ing costs and op­por­tu­nity costs.

In­ter­est pay­ments on the $787 bil­lion stim­u­lus pack­age will be about $500 bil­lion over a 30-year pe­riod, a to­tal ex­pense of about $1.3 tril­lion. As the pres­i­dent pointed out, this should gen­er­ate or re­tain about 4 mil­lion jobs at a cost of $325,000 a job. Think about that num­ber. If the pres­i­dent gave a $100,000 debit card to ev­ery un­em­ployed per­son, he could save two-thirds of the ex­pense.

When the gov­ern­ment bor­rows money, it means cap­i­tal is di­vested else­where. Amer­i­can in­vestors buy­ing debt do so at the ex­pense of other in­vest­ments, thus re­duc­ing money avail­able for pri­vate eco­nomic ac­tiv­ity. As gov­ern­ment spending ex­pands, pri­vate spending con­tracts. If banks buy U.S. se­cu­ri­ties, there is less money avail­able for lend­ing.

Even if for­eign­ers, namely the Chi­nese, pur­chase U.S. bonds, it takes money from pri­vate in­vest­ments, thus slow­ing long-term re­cov­ery. If the Fed­eral Re­serve buys the debt, it will re­sult in ei­ther higher in­ter­est rates — re­duc­ing eco­nomic ac­tiv­ity — or inflation, a hid­den tax on pur­chas­ing power.

With the stim­u­lus bill en­acted as law a fam­ily of four with a me­dian in­come of $61,223 will have a per capita debt bur­den of $140,989 — and that num­ber is ris­ing as I write it. Keep in mind this fig­ure does not in­clude state, lo­cal and per­sonal debt.

The na­tional debt last year was 75 per­cent of gross do­mes­tic prod­uct (GDP), higher than what it was in 1943. Af­ter the stim­u­lus plan, the ra­tio will be 84 per­cent and, if one were to an­tic­i­pate the pas­sage of Sec­re­tary Tim Gei­th­ner’s Fi­nan­cial Sta­bil­ity Plan de­signed to sta­bi­lize bank prob­lems, the U.S. ra­tio will be more than 100 per­cent. The only time in our his­tory that occurred was at the end of World War II, 1944-45.

At the mo­ment, there are only five na­tions with debt to GDP ra­tios in ex­cess of 100 per­cent — Zim­babwe, Le­banon, Ja­pan, Ja­maica and Italy.

It seems to me that with the Obama fis­cal pack­age eco­nomic prin­ci­ples have been ex­punged from the po­lit­i­cal world. Ap­par- ently, few can re­call the ar­gu­ments in the 20th cen­tury about pub­lic own­er­ship of the eco­nomic in­fra­struc­ture, the means of pro­duc­tion. I feel I am looking into a glass darkly without any mem­ory of cap­i­tal­ism’s ba­sic struc­ture and the need for pri­vate prop­erty own­er­ship.

Where are John Locke and Adam Smith when you need them? Or are we wit­ness­ing a na­tional dumb­ing down so pro­found that Amer­i­cans no longer un­der­stand or ap­pre­ci­ate how wealth was gen­er­ated in our eco­nomic sys­tem in the first place?

Ad­mit­tedly un­fet­tered mar­kets can gen­er­ate an ex­cess of greed and fraud. That ex­plains why even the most ar­dent de­fend­ers of the free mar­ket called for a reg­u­la­tory reg­i­men. Now, how­ever, a Demo­cratic ma­jor­ity has lost sight of eco­nomic prin­ci­ples and is in­tent on re­tain­ing present com­forts even if its ex­hausts the cap­i­tal ac­cu­mu­la­tion of the past. How does a po­lit­i­cal leader bal­ance de­sire and needs? How does he con­sider the re­al­ity of the present without bankrupt­ing the fu­ture?

To­day’s pol­icy is a res­cue of cap­i­tal mar­kets and grow­ing un­em­ploy­ment As I see it, the poli­cies now be­ing en­acted may have short-term gains — throw­ing so much cap­i­tal at our prob­lems is bound to have a mar­gin- ally pos­i­tive ef­fect. But the longterm con­se­quence is an os­si­fied econ­omy without the free­dom or cap­i­tal to in­no­vate.

Pres­i­dent Obama tells Amer­i­cans he is con­cerned about im­pos­ing a debt on the next gen­er­a­tion. Well, he may be con­cerned but, when you con­sider the num­bers, his ex­pres­sion of con­vic­tion is con­tra­dicted by re­al­ity.

Her­bert Lon­don is pres­i­dent of Hud­son In­sti­tute and pro­fes­sor emer­i­tus of New York Uni­ver­sity. He is the au­thor of “Decade of De­nial” (Lex­ing­ton Books, Lan­ham, Md., 2001) and “Amer­ica’s Sec­u­lar Chal­lenge” (En­counter Books).

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