The Last Link

Guest Post by The Zman

Way back in the early days of the conservative movement, it was assumed that Federal spending was both unsustainable and damaging to the country. Cutting the size and scope of government was their thing. The tool they eventually settled on to reduce Federal spending was taxes. If they made high taxes so unpopular with the public, the Left could not keep raising taxes. If they could not raise taxes to cover their spending, they would eventually have to yield to the mathematics.

Obviously, that never happened. The big tax reforms of the 1980’s did simplify taxes and lower rates on rich people, but revenues remained stable. At the same time, spending kept growing. One of the unspoken truths of fiscal policy is the percent of GDP that is consumed by Federal taxes does not change much of time. The range is between 15% to 18%, depending on when tax policy was changed. This is the logic of the flat tax. One rate, no deductions and no more IRS.

Spending, of course, keeps going up, no matter who is in office. Despite their rhetoric, the Republicans are the big spenders. In the 1980’s they had to spend on the military to win the Cold War. In the Bush years it was the crusades against Islam. It is only when a Democrat is in the White House that the Republicans get tight-fisted, and even that is mostly ceremonial, as we have seen with the last Covid bill. It turns out that there is no relationship between taxes and spending.

Another shibboleth of conservatives is that eventually the bond markets will force a haircut on the government. The so-called bond vigilantes will drive up interest rates, which will make borrowing more expensive. The theory here is that there is a hard limit on debt. Once that limit is reached, spending must go down or taxes must go up in order to reconcile the books. Like the belief that taxes will curtail spending, faith in the mythological bond vigilantes has been misplaced.

Of course, you can go back further and find arguments from the hard money crowd about the limits of fiat currency. There was an argument in the old days that said fiat currency not only unleashes spending and inflation, but it eventually makes the money worthless, thus bankrupting the state. We have been off the gold standard for a very long time now and none of the predictions came true. The spending continues, the borrowing continues, and the money creation continues.

The gold bugs have now moved to crypto currency as the savior. Once everyone is using digital money that is outside the control of the state, then we end up with a de facto gold standard. That will force fiscal discipline on the state, which means radically reducing spending. The fact that this will never happen has so far not dimmed the enthusiasm, but like all of the other schemes to cut spending, this one will prove no match for the animal cunning of the ruling class.

There is another theory related to money. The monetarists have always argued that sound monetary policy would impose discipline on the state. Since central banks are independent of the state, they can maintain a stable money supply. While not the same as a gold standard, sound monetary policy has similar effects. That has turned out to be a myth as well. The Fed is now captive to the spending frenzy of Washington, finding new ways to underwrite trillions in new outlays.

Now, there are those who will keep lighting candles for their favorite theory. The gold bugs, for example, are sure hyperinflation is around the next corner. The bond vigilantes are similarly sure the next crisis will confirm their theory. The truth is though, none of these theories turned out to be true. The official debt is $28T, but that excludes things like Social Security. The real debt obligations of the Federal government are incalculable. No one knows and no one seems to care.

The lesson of the last half century is one the monetarists learned from the battles over the gold standard. If the ruler is so corrupt you need hard money to control him, your ruler is corrupt enough to find a way around the limits of hard money. It turns out our rulers are more than capable of conniving around every limit put before them. They have reached levels of corruption that were though impossible half a century ago. The display being put on now suggest they are just getting warmed up.

This rather shabby track record should raise a question. That is, is the field of economics just pseudoscientific nonsense? It has lots of complexity and lots of very clever solutions to the complex problems it unearths, but outside of the most basic of concepts like supply and demand, economics is not very useful. In all of the important things, it turns out to be wrong. Astrologers have a better record than economists, because they know they are grifters, not scientists.

Putting that aside, the lesson here is that contra the libertarians, economics is downstream from politics. No amount of fiddling with the tax code can fix the defects of the political class. Even further, the right people in a corrupt system cannot correct the defects of the corrupt system. This is why the people come and go in Washington, but the corruption rolls on unimpeded. In the great chain of causality, economics is the last link in that chain. It is the final effect of a chain of many causes.

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oldtimer505
oldtimer505

Simple question, HOW DID THAT WORK OUT FOR US AS A COUNTRY, AS A WORLD? The criminal sides joined each other & cut a deal to tax our “everything” until?????

Oh by the way, I disagree with economics being the last link in the chain. Depopulation seems to have replaced it as a last link. Simply remove all those who disagree.

TampaRed

“The lesson of the last half century is one the monetarists learned from the battles over the gold standard. If the ruler is so corrupt you need hard money to control him, your ruler is corrupt enough to find a way around the limits of hard money. It turns out our rulers are more than capable of conniving around every limit put before them. They have reached levels of corruption that were though impossible half a century ago. The display being put on now suggest they are just getting warmed up.”

could it possibly be that the politicians are doing it to save their own skins b/c they would be voted out of office it they truly made a dent in spending?

Rusty Pipes
Rusty Pipes

Passing the bill onto future unborn (unaborted…) people is taxation without representation. True selfishness, cowardice, and greed. Most people make me sick.

starfcker
starfcker

Living in reality means abandoning or at least re-thinking all of your 1990’s theories. It means all the dead guys that everyone loves to quote around here may not be relevant in the ways that people think. I’m not saying don’t know your history, Lord knows we need more people that know history, not less. But some theories pan out, and some theories don’t. My most downvoted comments on this blog usually involved the theory that only a lethal and just federal government can remedy our current situation. Crackpot Libertarians and conservatives would almost live under corporate tyranny than admit their theories don’t solve our current situation. The world has moved on. It’s going to end up taking a Pinochet like solution. Reinstating the gold standard won’t solve a thing.

starfcker
starfcker
Anonymous
Anonymous

Corporations + government. And I believe it all has to do with G.R.E.E.D.

–GNL

Anonymous
Anonymous

Actually, … power. Money is a means to power, but power is a means to PRIDE …

different one of the Seven Deadly Sins, … just sayin’

Just Thinking
Just Thinking

Rusty,

I think the point is that the debt will never be paid, by anyone.

We, long ago, passed the point where taxation to pay it was doable. There simply is not enough wealth in existence to even scratch the surface of global debt.

It seems more likely that debt will just cease to be a thing.

Fiat currency will go away. We plebs will barter and/or adapt local currency while the powerful will just move wealth around digitally.

Ed
Ed

With fiat currencies, the proceeds of the loan don’t exist until the loan is created. Congress “borrows” money that the Fed doesn’t even have. The proceeds of the loan comes from skimming off value from existing fiat currency. The theory is that, as inflation rises, Congress will “pay back” the principal with inflated dollars.

If that makes any kind of sense to you, you might be qualified to become a Congresstwit.

very old white guy
very old white guy

I am with you on that and have been saying something similar for a long time now.

TN Patriot
TN Patriot

Our taxation system is nothing more than a means to move wealth from the middle class to the moocher class and upper class. It is Trickle Up Poverty for everyone, but them.

Anonymous
Anonymous

“plebs will barter and/or adapt local currency”

… well, that’s gonna be a bit of a problem

also, digital fiat is still fiat.

TN Patriot
TN Patriot

I cannot remember the last time we had a “conservative” government. Maybe under Eisenhower? Certainly, since the 60’s we have had uniparty control in CONgress.

August
August

Calvin Coolidge and Grover Cleveland are my heroes.

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