Borrowing From The Future

Politicians like to promise more than they can deliver. The Fed likes to promise goods and services today and payment for them later. Currently, budgets are a mess as a result of politicians making promises and saving the funding for these promises for later.

By David Merkel
July 15, 2013
Real Clear Markets

I am a fan of balanced budgets. Why? Balanced budgets are sustainable. This is particularly true if budgets are balanced on an accrual basis.

Politicians like to promise more than they deliver. They are like J. Wellington Wimpy, who said, "I would gladly pay you Tuesday for a hamburger today." Goods and services today, payment later.

This happens in a lot of ways, large and small:

-Federal Pension Plans are unfunded, supported by the taxation authority of the Federal Government.
-Running large deficits that don't do much good for the economy as a whole, while racking up debts that will have to be paid by future generations.
-Running monetary policies that improve conditions today, but will worsen future conditions as a result. Far better to let recessions bite, eliminating bad debt & projects, and leave behind a less indebted society, ready to grow.
-Social Security & Medicare are unsustainable programs created by our grandparents, sustained by our parents. These programs will kill the rest of us with their costs. Our forebears ate sour grapes, and our teeth are set on edge. And with each generation it gets worse, as the demographic crisis makes it harder to sustain.
-Obamacare front-end loaded taxes, and back-end loaded benefits. We are now faced with the costs, and the taxes have been spent on other matters. Aside from that, the estimates when the bill was passed were dishonest.
-States & municipalities played with their pension assumptions for years, offering generous benefits that could not be afforded under intelligent assumptions. It becomes benefits today, taxes tomorrow.
-Tax policy encourages debt rather than equity, creating industries that over-borrow.

Things could have been better at this point had the Fed done its job and let recessions bite, eliminating bad debts. Congress could have run balanced budgets, constraining spending on all departments. The Social Security surplus could have been walled off from the government, and invested in index funds. States & municipalities could have funded their pension plans fully, and not used the flexibility to fund other spending. We could have had a tax code that did not tax dividends, but offered no deduction for interest. We could have constrained the Fed's ability to act.

We have a mess now as a result of politicians promising, with funding to some later. In the 1840s over-indebted governments defaulted, and there were many revolutions in Europe. What will be the price in the modern era, with our over-indebted governments?

I don't know. But I suspect it will be ugly.

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