Debate Assignment:
Should We Never Pay Down the National Deficit or Debt (even partly)?
Bob Jensen
at Trinity University
U.S. National Debt
Clock ---
http://www.usdebtclock.org/
Also see
http://www.brillig.com/debt_clock/
Question
Should we keep increasing the government spending deficit and the national debt
every year ad infinitum?
Answers
Although in these down economic times, the liberal's Keynesian hero and Nobel
Prize economist, Paul Krugman, thinks recovery is stalled because the government
is not massively increasing spending deficits. But he's not willing to commit
himself to never reducing deficits or never paying down some of the national
debt. Hence, he really does not answer the above question ---
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html
So let's turn to a respected law professor who advocates increasing the
government spending deficit and the national debt every year ad infinitum?
"Why We Should Never Pay Down the National Debt (even partly)," by
Neil H. Buchanan George Washington University Law School), SSRN, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101811
Abstract:
Calls either to balance the federal budget on an annual basis, or to pay
down all or part of the national debt, are based on little more than
uninformed intuitions that there is something inherently bad about borrowing
money. We should not only ignore calls to balance the budget or to pay down
the national debt, but we should engage in a responsible plan to increase
the national debt each year. Only by issuing debt to lubricate the financial
system, and to support the economy’s healthy growth, can we guarantee a
prosperous future for current and future citizens of the United States.
Student Assignment
Since many of the most liberal economists are
not quite
willing to assert that "we should never pay down the national debt," what
questionable and unmentioned assumptions have been made by Neil H. Buchanan
that need to be addressed?
Are some of these assumptions unrealistic in any world
other than a utopian world?
Assumption 1
Debt We Owe to Ourselves is Not Debt --- Such Debt is Really an Asset
In addition, the federal government’s debt is
partly held internally, with some federal agencies holding Treasury bonds
on their books as assets. The most important of these agencies is the
Social Security Administration, which accounts for its accumulated annual
budget surpluses by holding Treasuries, thereby lending its annual surpluses
to the rest of the federal government.28 This means that the total federal
debt is only partly held by parties that are not part of the federal
government, creating a distinction between the total federal debt and the
“debt held by the public
Buchanan, Page 687
Jensen Comment
Did Professor Buchanan ever take an accounting course? Debt that you owe to
your self is not an asset. If it was an asset we
could create $200 trillion in the Social Security Trust Funds by giving it
$200 trillion worth of treasury bonds, thereby creating "assets" for no cost
or sacrifice to the government. The fact of the matter was that
at one point in time the Social Security Trust Funds held genuine assets
based on the contributions of employees and their employers (that FICA tax
sent to the government). But Congress in its own ignorance long ago raided
those real SS Trust Fund assets and replaced them with IOUs so it could
spend the FICA funds for other purposes. The IOUs are hardly the same type
of assets. Debt you owe yourself is not an asset and will one day have to be
replaced by genuine assets (e.g., tax increases) when the SS checks must be
sent to retirees and disabled persons.
It has, nonetheless, been argued that the
economic question is not whether the U.S. bonds held by Social Security
represent legal obligations that will be fulfilled but whether the Trust
Fund represents savings that help preclude a need to raise taxes in the
future even if current taxes collected cannot support the benefits paid.
This may not settle the economic question, however, since it has been
contended that if the government would have paid as much or more to
borrow from other sources were it not for the Fund, lower government
spending was not enabled and there was accordingly no economic
contribution to government savings. Complicating an analysis is the
point of view adopted (if the fund lends to the rest of government at a
below-market rate of interest, it represents a loss to future Social
Security beneficiaries under a narrow view, but possibly a gain under a
larger view since the government gains from the low cost funding and the
fiscal health of the government stands behind the ultimate solvency of
Social Security). Comparative borrowing assessments may also affected by
crowding out effects.
Was the money added to the fund in 1980, for
example, saved so that it could be spent on a retiring baby boomer in
2020 without a tax increase? If the only way for the federal government
to repay the bonds held by Social Security is by raising taxes in 2020,
this suggests that the excess money collected in 1980 was spent on other
government activities, not saved by Social Security. However, if bonds
are repaid by other borrowing, then the fund could be viewed as just one
of many potential lenders to the federal government. Using this point of
view, having to replace the Trust as a lender because it is recalling
its loan is not evidence that the money was simply spent, but rather
that lenders have shifted. If there are tax increases, those who believe
the trust fund is real might also note that tax increases could have
been even higher without the trust fund.
http://en.wikipedia.org/wiki/Social_Security_Trust_Fund#2011_activity_and_financial_status
Governmental accounting is mostly done with smoke and mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Lets just crank out trillions in assets for entitlement funds by
giving them unlimited treasury bonds.
Am I missing something here?
Assumption 2
Only Health Care Costs Present a Danger to the Sustainability of Economic
Prosperity Attainable Massive in Deficits and National Debt
Based on available forecasts of the federal
government’s likely spending and taxing levels, only health care costs pose
a serious danger of creating the kind of systemic crisis that could bring
down the economic system. The remainder of the federal government’s
finances, including Social Security payments during the retirement years of
the Baby Boom generation, is entirely under control, with no indication that
long-term borrowing needs would approach anything close to unsustainable
levels.
Buchanan, Page 690
Jensen Comment
Firstly, there's a huge assumption here that health care costs can be
"managed" while increasing the quality care and coverage provided to
virtually all residents of the United States. Buchanan admits there's a real
danger that real danger that rising health care costs will through a monkey
wrench into his entire thesis. And he offers no analysis of why this won't
come to pass.
Secondly, there's a huge assumption that all other government spending
will not spin out of control. But his arguments are superficial to a point
of being ludicrous. For example, to control serious inflation the Fed at
some point may have to double artificially low interest rates. Suppose that
the national debt stands at $50 trillion when interest rates averaging 3%.
If these interest rates must be doubled to 6% in an attempt to bring down
inflation, nearly all the $50 trillion will have to be rolled over at twice
the interest cost paid out to the government's creditors.
I would argue that there are many threats other than health care costs
that can spin out of control with interest on the national debt being one of
them..
And this is only one type of government expenditure that can spin out of
control
Professor Buchanan ignores that Congressional spending is heavily
impacted by lobbying interests, each of which wants more subsidies and few
of which will probably spend this money for a net increase in the GDP.
An example of how the government hands out subsidies for political rather
than economic reasons are the billions given to corn ethanol producers to
produce product that is totally unviable from an economic perspective. Even
environmentalist Al Gore admits that corn ethanol subsidies are politically
motivated disasters.
I had almost zero respect for Nobel Prize winner Al Gore's persistent
advocacy of corn ethanol that takes more energy to produce than is gained.
Also ethanol purportedly generates
twice as much
ozone as gasoline in traditional combustion engines and is absurdly
expensive to transport.
I had more respect for Al Gore after he admitted that he supported corn
ethanol subsidies for political reasons rather than either economic or
environmental reasons.
"Al Gore's Ethanol Epiphany: He concedes the industry he promoted
serves no useful purpose" The Wall Street Journal, November 22,
2010 ---
http://online.wsj.com/article/SB10001424052748703572404575634753486416076.html?mod=djemEditorialPage_t
Anyone who opposes ethanol subsidies, as these
columns have for decades, comes to appreciate the wisdom of St. Jude.
But now that a modern-day patron saint—St. Al of Green—has come out
against the fuel made from corn and your tax dollars, maybe this isn't
such a lost cause.
Welcome to the college of converts, Mr. Vice
President. "It is not a good policy to
have these massive subsidies for first-generation ethanol," Al Gore told
a gathering of clean energy financiers in Greece this week. The benefits
of ethanol are "trivial," he added, but "It's hard once such a program
is put in place to deal with the lobbies that keep it going."
No kidding, and Mr. Gore said he knows from
experience: "One of the reasons I made that mistake is that I paid
particular attention to the farmers in my home state of Tennessee, and I
had a certain fondness for the farmers in the state of Iowa because I
was about to run for President."
Mr. Gore's mea culpa underscores the degree to
which ethanol has become a purely political machine: It serves no
purpose other than re-electing incumbents and transferring wealth to
farm states and ethanol producers. Nothing proves this better than the
coincident trajectories of ethanol and Mr. Gore's career.
Continued in article
But even in these 2012 times of severe drought in the corn belt when at
last we have good reason to stop these absurd subsidies to corn ethanol
producers, we have a huge example of how hard it is to shut down a wasteful
industry that should be shut down entirely. It's just not politically
feasible to end wasteful subsidies that millions of voters have become
dependent upon over the years.
The undesirable tobacco industry is not only protected by politics it
still received government subsidies. It's virtually impossible to shut a
government subsidy program down not matter how undesirable or inefficient it
becomes.
Assumption 3
Those few instances where the government can utilize economic resources more
efficiently (than private industry) are not offset where government massively
burns up economic resources due to waste, inefficiency, and fraud.
It is important to remember, however, that the
government can sometimes use economic resources in more productive ways than
those resources would have been used by private businesses. When the
government engages in productive investment, such as building the
infrastructure that allows private commerce to flourish, that spending more
than pays for itself. For example, the best recent economic research
indicates that each dollar spent to prevent students from dropping out of
school before receiving their high school diplomas results in a return to
the government of between $1.45 to $3.55, saving approximately $90 billion
for each year that the government succeeds in halving dropout rates from
current levels.
Buchanan, pp. 691-692
Jensen Comment
Perhaps there are instances where the government can be more productive than
private industry, but private industry generally faces a market discipline
that government does not face, thereby leading to countless areas where the
government squanders resources in ways that are unimaginable in private
industry. For example, the Pentagon has no idea how much total inventory it
has or how many hundreds of billions of this inventory is lost, stolen, or
outdated. The GAO says some enormous government agencies are unauditable,
including the Pentagon and the IRS. And hence these agencies operate without
audits that make the agencies accountable for lost resources.
Thus those rare instances where the government is more productive in
terms of resources are massively overcome by instances where the government
spending is out of control A good example, is the Medicare
reimbursements to clever thieves bill the system over and over again with
phony claims such as claims for equipment and medication that never existed.
Another example, is the lifetime disability and Medicare coverage awarded to
millions of people who are not truly disabled. Still another example, is the
billions of tax refunds given to crooks with phony IDs.
And that $90 billion return arising from preventing school dropouts is
predicated on the assumption that there is a legitimate economic opportunity
for those drop outs and a great desire on their parts to be productive. Many
of those dropouts are not and never will have the aptitude or motivation or
opportunity to become anything more than they would have been without high
school diplomas that in most instances are now given out to anybody who
shows up regularly for class. That of course does not mean we should
encourage dropping out in order to be more efficient with school budgets.
I'm not saying this at all. But it's not clear that we should spend a
million dollars of government funding on each and every potential dropout.
Assumption 4
If the government were to adopt the Golden Rule in its budgeting every trillion
dollars added to the deficit will return more than a trillion dollars
With these considerations in mind, economists
have devised a budget rule that maximizes long-term economic growth, dubbing
it the “Golden Rule.” Under the Golden Rule, the federal government would
borrow money to finance its spending on productive investments, and it would
collect enough taxes to cover its other spending, including interest
payments on the debt, on a cyclically-adjusted basis—that is, after allowing
for increased deficits during economic downturns.
Buchanan, pp. 692-693
Jensen Comment
This all hinges on the assumption that there are opportunities for such
trillion dollar returns and that the government can implement this level of
spending efficiently and effectively to achieve such long-term returns. The
evidence, however, is just the opposite. Instead the government is coaxed by
hucksters to invest in enterprises only to discover, belatedly, that other
nations in the global economy are more effective and efficient in those
enterprises. An example from above are the massive subsidies given to corn
ethanol producers when in fact the sugar cane ethanol producers in Brazil
produce a sugar cane ethanol product that is much more cost effective
because sugar cane ethanol is much more chemically superior to corn ethanol.
Professor Buchanan also ignores time value of money when he throws out
the phrase "long-term." For example, investing trillions to colonize Mars or
the moon may commence to yield returns in 200 years, but in the meantime
annual interest is paid on the debt over 200 years to fund this "long-term
productive investment."
What Professor Buchanan fails to mention is that government funding often
is necessary when there are externalities that make the investments good
things for uneconomic reasons. For example, spending $1 billion per child to
develop a drug to save the lives of 100 children over a 10-year horizon may
have ethical and humane benefits but certainly not economic benefits.
The government is intended to provide funding for many good things that
would not be profitable to produce in the business world.
Professor Buchanan downplays austerity in favor of deficit financing. but
he never mentions California or the PIGS nations in Europe that have with
massive debt that has reached or nearly-reached junk status. Governments
that are not allowed to inflate their way out of debt default by printing
currency have little choice other than austerity unless they are saved by
other governments. In order to inflate its way out of default Greece, for
example, will have to withdraw from the Euro Zone and California will have
to withdraw from the Dollar Zone so they can print unlimited amounts of
their own currencies.
Professor Buchanan assumes that the National Debt of the United States
has no limits such that its possible to have no austerity and unlimited
trillions of National Debt without having to fear junk status of U.S.
Treasury bonds. I don't know any respected economist that supports this
assumption. The Fed has already purchased over $2 trillion in U.S.
Treasury bonds, which is tantamount to printing greenbacks to spend rather
than tax or borrow. Even though the government in the 1990s redefined
inflation (by throwing out food and fuel price increases) while keeping in
the depressed housing costs so as to hide how bad inflation is growing, the
economic recovery so slow that inflation has not really jumped like it will
if the Fed continues to print money when recovery finally arrives.
Assumption 5
If deficits threatening the rollover of National Debt as sustainable rates of
interest, the threat can be averted by raising taxes on the wealthy
Moreover, if the worst-case forecasts of
spiraling health care costs turn out to be true, there is nothing that could
be done elsewhere in the budget to avert catastrophe. The best long-term
path would include increased taxes on the wealthiest Americans, which would
allow the government to finance the rest of its operations (other than
health care) easily for decades to come.
Buchanan, pp. 690-691
This is the typical assumption of the liberals that the wealthy people
are a piñata that when, banked with a taxation stick, will shower down all
the money that 's needed to restore prosperity in dire times. This might've
been somewhat the case when the deficits of the U.S. were under $1
trillion. But in Buchanan's scenario that deficits can keep rising by
trillions upon trillions, it's not at all clear that confiscating the entire
incomes of high income taxpayers would even cover increased interest costs
on the debt.
At present we're already sticking it to the rich.
"CBO: The wealthy pay 70 percent of taxes," by Stephen Dinan, The
Washington Times, July 10, 2012 ---
http://www.washingtontimes.com/news/2012/jul/10/cbo-rich-pay-outsized-share-taxes/
And most other nations are finding that lowering their highest marginal
tax rates increased GDP.
Marginal Tax Rate Declines in the Rest of the World ---
http://www.econlib.org/library/Enc/MarginalTaxRates.html
Table 1 Maximum Marginal Tax
Rates on Individual Income
|
*. Hong Kong�s maximum tax (the �standard rate�) has
normally been 15 percent, effectively capping the marginal
rate at high income levels (in exchange for no personal
exemptions). |
|
**. The highest U.S. tax rate of 39.6 percent after 1993
was reduced to 38.6 percent in 2002 and to 35 percent in
2003. |
|
| |
1979 |
1990 |
2002 |
| Argentina |
45 |
30 |
35 |
| Australia |
62 |
48 |
47 |
| Austria |
62 |
50 |
50 |
| Belgium |
76 |
55 |
52 |
| Bolivia |
48 |
10 |
13 |
| Botswana |
75 |
50 |
25 |
| Brazil |
55 |
25 |
28 |
| Canada (Ontario) |
58 |
47 |
46 |
| Chile |
60 |
50 |
43 |
| Colombia |
56 |
30 |
35 |
| Denmark |
73 |
68 |
59 |
| Egypt |
80 |
65 |
40 |
| Finland |
71 |
43 |
37 |
| France |
60 |
52 |
50 |
| Germany |
56 |
53 |
49 |
| Greece |
60 |
50 |
40 |
| Guatemala |
40 |
34 |
31 |
| Hong Kong |
25* |
25 |
16 |
| Hungary |
60 |
50 |
40 |
| India |
60 |
50 |
30 |
| Indonesia |
50 |
35 |
35 |
| Iran |
90 |
75 |
35 |
| Ireland |
65 |
56 |
42 |
| Israel |
66 |
48 |
50 |
| Italy |
72 |
50 |
52 |
| Jamaica |
58 |
33 |
25 |
| Japan |
75 |
50 |
50 |
| South Korea |
89 |
50 |
36 |
| Malaysia |
60 |
45 |
28 |
| Mauritius |
50 |
35 |
25 |
| Mexico |
55 |
35 |
40 |
| Netherlands |
72 |
60 |
52 |
| New Zealand |
60 |
33 |
39 |
| Norway |
75 |
54 |
48 |
| Pakistan |
55 |
45 |
35 |
| Philippines |
70 |
35 |
32 |
| Portugal |
84 |
40 |
40 |
| Puerto Rico |
79 |
43 |
33 |
| Russia |
NA |
60 |
13 |
| Singapore |
55 |
33 |
26 |
| Spain |
66 |
56 |
48 |
| Sweden |
87 |
65 |
56 |
| Thailand |
60 |
55 |
37 |
| Trinidad and Tobago |
70 |
35 |
35 |
| Turkey |
75 |
50 |
45 |
| United Kingdom |
83 |
40 |
40 |
| United States |
70 |
33 |
39** |
|
| Source:
PricewaterhouseCoopers; International Bureau of Fiscal
Documentation. |
Jensen Conclusion
It's easy to understand why Professor Buchanan is a law school professor and not
a professor of economics. I don't know of a single economist who advocates never
running (at least in part) the national debt.
"Why 'New York Times' Economist Paul Krugman Is Partly Right But Mostly Wrong,"
by Michael T. Snyder, Seeking Alpha, May 3, 2012 ---
http://seekingalpha.com/article/556041-why-new-york-times-economist-paul-krugman-is-partly-right-but-mostly-wrong
In recent days, New York Times economist Paul
Krugman has been doing a whole bunch of interviews in which he has declared
that the solution to our economic problems is very easy. Krugman says that
all we need to do to get the global economy going again is for the
governments of the world to start spending a lot more money.
Krugman believes that austerity is only going to
cause the economies of the industrialized world to slow down even further
and therefore he says that it is the wrong approach. And you know what?
Krugman is partly right about all of this. The false prosperity that the
United States and Europe have been enjoying has been fueled by unprecedented
amounts of debt, and in order to maintain that level of false prosperity we
are going to need even larger amounts of debt. But there are several reasons
why Krugman is mostly wrong.
First of all, we have not seen any real "austerity"
yet. Even though there have been some significant spending cuts and tax
increases over in Europe, the truth is that nearly every European government
is still piling up more debt at a frightening pace. Here in the United
States, the federal government continues to spend more than a trillion
dollars a year more than it brings in. If the United States were to go to a
balanced federal budget, that would be austerity.
What we have now is wild spending by the federal
government beyond anything that John Maynard Keynes ever dreamed of.
Secondly, Krugman focuses all of his attention on making things more
comfortable for all of us in the short-term without even mentioning what we
might be doing to future generations. Yes, more government debt would give
us a short-term economic boost, but it would also make the long-term
financial problems that we are passing on to our children even worse.
It is important to understand that Paul Krugman is
a hardcore Keynesian. He believes that national governments can solve most
economic problems simply by spending more money. His prescription for the
U.S. economy in 2012 was summarized in a recent
Rolling Stone article:
The basic issue, says Krugman, is a lack of
demand. American consumers and businesses, aren't spending enough, and
efforts to get them to open their wallets have gone nowhere. Krugman's
solution: The federal government needs to step in and spend. A lot. On
debt relief for struggling homeowners; on infrastructure projects; on
aid to states and localities; on safety-net programs. Call it "stimulus"
if you like. Call it Keynesian economics, after the great economic
thinker (and Krugman idol) John Maynard Keynes, who first championed the
idea that government has an essential role in saving the free market
from its own excesses.
So, is Krugman right? Would the U.S. economy
improve if the federal government borrowed and spent an extra half a
trillion dollars this year for example? Yes, it would. But it would also get
us half a trillion dollars closer to bankruptcy as a nation.
Krugman claims that "austerity" has failed, but the
truth is that we have not even seen any real "austerity" yet. When a
government spends more than it brings in, that is not real austerity. People
talk about the "austerity" that we have seen in places such as Greece and
Spain, but the truth is that both nations are still piling up huge amounts
of new debt. So let's not pretend that the western world is serious about
austerity.
The goal for most European nations at this point is
to get their debts down to "sustainable" levels. But for economists such as
Krugman, this is a very bad idea. Krugman insists that cutting government
spending during a recession is a very stupid thing to do. The following is
from one of his recent articles
in the New York Times:
For the past two years most policy makers in
Europe and many politicians and pundits in America have been in thrall
to a destructive economic doctrine. According to this doctrine,
governments should respond to a severely depressed economy not the way
the textbooks say they should — by spending more to offset falling
private demand — but with fiscal austerity, slashing spending in an
effort to balance their budgets.
Critics warned from the beginning that
austerity in the face of depression would only make that depression
worse. But the “austerians” insisted that the reverse would happen. Why?
Confidence! “Confidence-inspiring policies will foster and not hamper
economic recovery,” declared Jean-Claude Trichet, the former president
of the European Central Bank — a claim echoed by Republicans in Congress
here. Or as I put it way back when, the idea was that the confidence
fairy would come in and reward policy makers for their fiscal virtue.
Yes, Krugman is correct that government austerity
measures will only make a recession worse. Just look at what has happened in
Greece. Wave after wave of austerity measures has pushed Greece into an
economic depression. If you want to see what austerity has done to the
unemployment rate in Greece, just check out
this chart.
As other nations across Europe have taken measures
to get debt under control, we have seen similar economic results all across
the continent. The overall unemployment rate in the eurozone has hit
10.9 percent which is a new all-time high, and
youth unemployment rates throughout Europe are
absolutely skyrocketing.
Right now there are already
12 countries in Europe that are officially in a
recession, and in many European nations manufacturing activity
is slowing down dramatically. So, yes, austerity
is not helping short-term economic conditions in Europe.
But what are the nations of the western world
supposed to do? According to Krugman, they are supposed to run up gigantic
amounts of new debt indefinitely. And that is what the United States is
doing right now. But at some point the clock strikes midnight and all of a
sudden you have become the "next Greece". U.S. government debt is already
rising much, much faster than U.S. GDP is.
Between 2007 and 2010, U.S. GDP grew by only 4.26
percent, but the U.S. national debt soared
by 61 percent during that same time period. Today,
the U.S. national debt is equivalent to
101.5 percent of U.S. GDP. But Paul Krugman does
not consider this to be a major problem.
The Obama administration is currently stealing
approximately
150 million dollars from our children and our
grandchildren every single hour to finance our reckless spending, but for
Paul Krugman that is not nearly good enough. To Krugman, the only thing that
is important is what is happening right now. Apparently the future can be
thrown into the toilet as far as he is concerned.
The founder of PIMCO, Bill Gross, told CNBC on
Tuesday that the U.S. government is likely to be hit with
another credit rating downgrade this year if
something is not done about our exploding debt.
The United States already has more government debt
per capita than Greece, Portugal, Italy, Ireland
or Spain does. But Krugman insists that the solution to our economic
problems is even more debt and even more spending.
In a previous article, I detailed how
we are doomed if the U.S. government keeps
spending money wildly like this and
we are doomed if the
U.S. governments stops spending money wildly like this.
If we keep running trillion dollar deficits every
year, at some point our financial system will collapse, the U.S. dollar
will fail, and we
will essentially be facing national bankruptcy.
But if the federal government stops borrowing and
spending money like this, our debt-fueled prosperity will rapidly disappear,
unemployment will shoot well up into double digits, and we will soon have
mass rioting in major U.S. cities.
The truth is that we have already been following
Paul Krugman's economic prescription for the nation for decades. Our
15 trillion dollar party has funded a standard of
living unlike anything the world has ever seen, but the party is coming to
an end.
The Federal Reserve is trying to keep the party
going by buying up huge amounts of government debt. The Fed actually
purchased approximately
61 percent of all government debt issued by the
U.S. Treasury Department in 2011.
It is a shell game that cannot go on for too much
longer. The
national debt crisis can be delayed for a while,
but at some point the house of cards is going to come crashing down on top
of us all.
"Pending Collapse of the United
States" ---
http://www.trinity.edu/rjensen/entitleme
"TOP TEN MYTHS OF MEDICARE," by Richard L. Kaplan, The Elder Law Journal,
Vol. 20, No.1, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2111535
In the context of changing demographics, the
increasing cost of health care services, and continuing federal budgetary
pressures, Medicare has become one of the most controversial federal
programs. To facilitate an informed debate about the future of this
important public initiative, this article examines and debunks the following
ten myths surrounding Medicare: (1) there is one Medicare program, (2)
Medicare is going bankrupt, (3) Medicare is government health care, (4)
Medicare covers all medical cost for its beneficiaries, (5) Medicare pays
for long-term care expenses, (6) the program is immune to budgetary
reduction, (7) it wastes much of its money on futile care, (8) Medicare is
less efficient than private health insurance, (9) Medicare is not
means-tested, and (10) increased longevity will sink Medicare.
Jensen Comment
I don't agree with every conclusion in this paper, but it is one of the best
summaries of Medicare that I can recommend.
Waste, Fraud, and Abuse: The gap between
payments and payees in Medicare makes it a criminal's piñata
It should be emphasized at the outset that this
contention is not about the ever-present specter of “waste, fraud, and
abuse” that haunts governmental programs generally. That Medicare is
targeted by scammers and schemers of all sorts is both indisputable and
hardly surprising. As the famed bank robber, Willie Sutton, reportedly
replied when asked why he robbed banks: “That’s where the money is.”101
Indeed, Medicare is where the money is—specifically $509 billion in fiscal
year 2010 alone.102 Any program that pays out this amount of money to a wide
variety of service providers in literally every county in America will be
very difficult to police. That reality notwithstanding, such violations of
the public trust as are encapsulated in the phrase “waste, fraud, and abuse”
should be ferreted out whenever possible and eliminated. No one excuses
these leakages, just as no one has a sure-fire solution to stem them once
and for all.
Kaplan, Page 19
One thing to think about is why
Medicare may be losing hundreds of billions of dollars relative to the national
health care plans of Canada, Europe, etc. The obvious thing to pick on is that
Medicare is a third party payment system where medical services, medications,
equipment such as battery-powered scooters and home hospital beds, and medical
care centers are not directly managed by the government. This opens the
door to millions of fraudulent claims, often by extremely clever criminals,
unscrupulous physicians, etc. The gap between payments and payees in Medicare
makes it more vulnerable to abuse and waste.
This and other articles make a
big deal about how administrative costs of Medicare are significantly less that
the administrative costs of private insurance carriers like Blue Cross. However,
what this article and related articles almost always fail to mention is that the
major component of administrative cost to companies like Blue Cross lies in
operating controls to prevent waste, fraud, and abuse.
National plans like those in
Canada have both lower administrative costs and less waste, fraud, and abuse
because the government provides most of the services directly without the moral
hazards that arise from the gap between funding and delivery of services.
Personally, I favor national plans. Of course, in some nations like Germany
there are premium alternatives where people that can afford it can pay for
premium services not covered in the national plans.
http://www.trinity.edu/rjensen/Health.htm
Futile Care Waste: My
former University of Maine colleague was given thirty days to live (because of
Stage Four bone cancer) received two new hips but never walked again and died in
less than two weeks
But the issue of “futile care” is very different
from “waste, fraud, and abuse.” The claim that Medicare should not pay for
pointless medical interventions presumes that funds were indeed spent on
actual medical procedures. The issue is whether those procedures should not
have been done for reasons of inefficacy or insufficient “bang for the
buck.” It is certainly true that Medicare spends a disproportionate amount
of its budget on treatments in the final months of its beneficiaries’ lives.
Some twenty-eight percent of the entire Medicare budget is spent on medical
care in enrollees’ final year of life,103 and nearly forty percent of that
amount is spent during a patient’s last month. The critical issue, of
course, is whether these expenditures are pointless.
In one respect, it is not surprising that the cost
of a person’s final medical episode is unusually expensive. That person’s
presenting condition must have been especially severe because he or she did
in fact die during or shortly after treatment. Moreover, when circumstances
are particularly bleak, more intensive and often much more expensive
procedures, tests, and interventions seem appropriate. After all, the
patient was literally fighting off death at that point, so medical personnel
try everything in their armamentarium to win what was ultimately the
patient’s final battle. Only after the fact does one know that the battle in
question was indeed the patient’s last episode. Does that mean that the
effort expended, and the attendant costs, were wasted?
This question is more difficult than some might
suspect. A recent study of Medicare claims data examined the association
between inpatient spending and the likelihood of death within thirty days of
a patient’s being admitted to a hospital.It found that for most of the
medical conditions examined, including surgery, congestive heart failure,
stroke, and gastrointestinal bleeding, a ten percent increase in inpatient
spending was associated with a decrease in mortality within thirty days of
3.1 to 11.3%, depending upon the specific medical condition in question.
Only for patients who presented with acute myocardial infarction was there
no association of increased inpatient spending and improved outcomes. Thus,
the authors concluded, “the amount [of waste] may not be as large as
commonly believed, at least for hospitalized Medicare patients.” To be sure,
the results might not be as encouraging in non-hospital settings, but
Medicare does not cover the cost of nursing home patients who are lingering
at death’s door while receiving “custodial care.”In any case, hospital costs
represent the single largest component of Medicare’s expenditures— fully
twenty-seven percent in the most recent year for which such data are
available.
That is not to say that some of Medicare’s
expenditures near the end of beneficiaries’ lives provide insufficient
benefit to justify their cost. But the tough questions are how to determine
those wasteful expenditures in advance and who should make that
determination. Such considerations are beyond the scope of this Article,but
suffice it to note that end-of-life care discussions are extraordinarily
contentious and easily demagogued. After all, former Vice Presidential
candidate Sarah Palin effectively scuttled a rather benign effort to include
payment for end-of-life counseling in Medicare’s newly provided “annual
wellness visit[s]” by contending that such counseling was a first step to
rationing health care by “death panels” run by government bureaucrats. Thus,
while patients can individually indicate in advance how much treatment they
want at the end of their lives, any comprehensive effort to root out
Medicare’s wasteful expenditures on “futile care” might face serious
political opposition.
In any case, an authoritative analysis published in
The New England Journal of Medicine concluded that “the hope of
cutting the amount of money spent on life-sustaining interventions for the
dying in order to reduce overall health care costs is probably vain.” The
authors noted that “there are no reliable ways to identify the patients who
will die” and that “it is not possible to say accurately months, weeks, or
even days before death which patients will benefit from intensive
interventions and which ones will receive ‘wasted’ care.” That leaves
age-based rationing of care or more precisely, denial of medical services on
the basis of chronological age, as the only easily implemented pathway to
eliminate what some might regard as inefficacious expenditures of medical
resources. Such age-based rationing of health care is practiced in other
national health care systems, even though studies of prognostic models have
demonstrated that “age alone is not a good predictor of whether treatment
will be success ful.” In any case, polls of Americans have shown little
support and significant opposition to the concept. One survey undertaken in
late 1989 sought agreement with the following statement: “Lifeextending
medical care should be withheld from older patients to save money to help
pay for the medical care of younger patients.” Only 5.7% of respondents
under age sixty-five strongly agreed with this statement while 38.3% of that
group strongly disagreed with it.120 Interestingly, among respondents who
were themselves age sixty-five and older, the gap between these opposing
viewpoints was narrower: 8.8% strongly agreed with the statement in question
while 35.4% strongly disagreed.
Whether results would be substantially different
today when the range of medical interventions has increased significantly
and when the nation’s budgetary situation has worsened considerably is an
open question. Yet, when the 2010 health care reform legislation created an
Independent Payment Advisory Board to reduce Medicare’s expenses, the
enabling statute was explicit that this Board may not make proposals that
would “ration health care.” Clearly, the prospect of eliminating Medicare
expenditures that are medically futile will not be an easy task to
accomplish.
Kaplan, pp. 19-22
Jensen Comment
My former University of Maine
colleague on Medicare was given thirty days to live (because of Stage Four bone
cancer) received two new hips but never walked again and died in less than two
weeks. I don't think he would've received those two useless and very expensive
hips on any of the national plans of Canada or Europe.
Where Did Medicare Go So Wrong?
Medicare is a much larger and much more complicated entitlement burden relative
to Social Security by a ratio of about six to one or even more. The Medicare
Medical Insurance Fund was established under President Johnson in1965.
Note that Medicare, like Social Security in general, was intended to be
insurance funded by workers over their careers. If premiums paid by workers and
employers was properly invested and then paid out after workers reached
retirement age most of the trillions of unfunded debt would not be precariously
threatening the future of the United States. The funds greatly benefit when
workers die before retirement because all that was paid in by these workers and
their employers are added to the fund benefits paid out to living retirees.
The first huge threat to sustainability arose beginning in 1968 when medical
coverage payments payments to surge way above the Medicare premiums collected
from workers and employers. Costs of medical care exploded relative to most
other living expenses. Worker and employer premiums were not sufficiently
increased for rapid growth in health care costs as hospital stays surged from
less than $100 per day to over $1,000 per day.
A second threat to the sustainability comes from families no longer concerned
about paying up to $25,000 per day to keep dying loved ones hopelessly alive in
intensive care units (ICUs) when it is 100% certain that they will not leave
those ICUs alive. Families do not make economic choices in such hopeless cases
where the government is footing the bill. In other nations these families are
not given such choices to hopelessly prolong life at such high costs. I had a
close friend in Maine who became a quadriplegic in a high school football game.
Four decades later Medicare paid millions of dollars to keep him alive in an ICU
unit when there was zero chance he would ever leave that ICU alive.
On November 22, 2009 CBS Sixty Minutes aired a video featuring experts
(including physicians) explaining how the single largest drain on the Medicare
insurance fund is keeping dying people hopelessly alive who could otherwise be
allowed to die quicker and painlessly without artificially prolonging life on
ICU machines.
"The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009
---
http://www.cbsnews.com/stories/2009/11/19/60minutes/main5711689.shtml?tag=mncol;lst;1
What is really sad is the way Republicans are standing in the way of making
rational cost-benefit decisions about dying by exploiting the "Kill Granny"
political strategy aimed at killing a government option in health care reform.
See the "Kill Granny" strategy at ---
www.defendyourhealthcare.us
The third huge threat to the economy commenced in when disabled persons
(including newborns) tapped into the Social Security and Medicare insurance
funds. Disabled persons should receive monthly benefits and medical coverage
in this great land. But Congress should've found a better way to fund disabled
persons with something other than the Social Security and Medicare insurance
funds. But politics being what it is, Congress slipped this gigantic
entitlement through without having to debate and legislate separate funding for
disabled persons. And hence we are now at a crossroads where the Social Security
and Medicare Insurance Funds are virtually broke for all practical persons.
Most of the problem lies is Congressional failure to sufficiently increase
Social Security deductions (for the big hit in monthly payments to disabled
persons of all ages) and the accompanying Medicare coverage (to disabled people
of all ages). The disability coverage also suffers from widespread fraud.
Other program costs were also added to the Social Security and Medicare
insurance funds such as the education costs of children of veterans who are
killed in wartime. Once again this is a worthy cause that should be funded. But
it should've been separately funded rather than simply added into the Social
Security and Medicare insurance funds that had not factored such added costs
into premiums collected from workers and employers.
The fourth problem is that most military retirees are afforded full lifetime
medical coverage for themselves and their spouses. Although they can use
Veterans Administration doctors and hospitals, most of these retirees opted for
the underfunded
TRICARE plan the pushed most of the hospital and physician costs onto the
Medicare Fund. The VA manages to push most of its disabled veterans onto the
Medicare Fund without having paid nearly enough into the fund to cover the
disability medical costs. Military personnel do have Medicare deductions from
their pay while they are on full-time duty, but those deductions fall way short
of the cost of disability and retiree medical coverage.
The fifth threat to sustainability came when actuaries failed to factor in
the impact of advances in medicine for extending lives. This coupled with the
what became the biggest cost of Medicare, the cost of dying, clobbered the
insurance funds. Surpluses in premiums paid by workers and employers disappeared
much quicker than expected.
A sixth threat to Medicare especially has been widespread and usually
undetected fraud such as providing equipment like motorized wheel chairs to
people who really don't need them or charging Medicare for equipment not even
delivered. There are also widespread charges for unneeded medical tests or for
tests that were never really administered. Medicare became a cash cow for
crooks. Many doctors and hospitals overbill Medicare and only a small proportion
of the theft is detected and punished.
The seventh threat to sustainability commenced in 2007 when the costly
Medicare drug benefit entitlement entitlement was added by President George W.
Bush. This was a costly addition, because it added enormous drains on the fund
by retired people like me and my wife who did not have the cost of the drug
benefits factored into our payments into the Medicare Fund while we were still
working. It thus became and unfunded benefit that we're now collecting big time.
In any case we are at a crossroads in the history of funding medical care in
the United States that now pays a lot more than any other nation per capita and
is getting less per dollar spent than many nations with nationalized health care
plans. I'm really not against Obamacare legislation. I'm only against the lies
and deceits being thrown about by both sides in the abomination of the current
proposed legislation.
Democrats are missing the boat here when they truly have the power, for now
at least, in the House and Senate to pass a relatively efficient nationalized
health plan. But instead they're giving birth to entitlements legislation that
threatens the sustainability of the United States as a nation.
In any case, The New York Times presents a nice history of other
events that I left out above ---
http://www.nytimes.com/interactive/2009/07/19/us/politics/20090717_HEALTH_TIMELINE.html
"THE HEALTH CARE DEBATE: What Went Wrong? How the Health Care Campaign
Collapsed --
A special report.; For Health Care, Times Was A Killer," by Adam Clymer, Robert
Pear and Robin Toner, The New York Times, August 29,
1994 ---
Click Here
http://www.nytimes.com/1994/08/29/us/health-care-debate-what-went-wrong-health-care-campaign-collapsed-special-report.html
November 22, 2009 reply from Richard.Sansing
[Richard.C.Sansing@TUCK.DARTMOUTH.EDU]
The electorate's inability to debate trade-offs in
a sensible manner is the biggest problem, in my view. See
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/19/AR2009111904053.html?referrer=emailarticle
Richard Sansing
The New York Times Timeline History of Health Care Reform in the
United States ---
http://www.nytimes.com/interactive/2009/07/19/us/politics/20090717_HEALTH_TIMELINE.html
Click the arrow button on the right side of the page. The biggest problem with
"reform" is that it added entitlements benefits without current funding such
that with each reform piece of legislation the burdens upon future generations
has hit a point of probably not being sustainable.
Call it the fatal arithmetic of imperial decline.
Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk: How Great Powers Fail," Newsweek
Magazine Cover Story, November 26, 2009 ---
http://www.newsweek.com/id/224694/page/1
. . .
In other words, there is no end in sight to the
borrowing binge. Unless entitlements are cut or taxes are raised, there will
never be another balanced budget. Let's assume I live another 30 years and
follow my grandfathers to the grave at about 75. By 2039, when I shuffle off
this mortal coil, the federal debt held by the public will have reached 91
percent of GDP, according to the CBO's extended baseline projections.
Nothing to worry about, retort -deficit-loving economists like Paul Krugman.
. . .
Another way of doing this kind of exercise is to
calculate the net present value of the unfunded liabilities of the Social
Security and Medicare systems. One recent estimate puts them at about
$104 trillion, 10
times the stated federal debt.
Continued in article
This is now President Obama's problem with or without new Obamacare
entitlements that are a mere drop in the bucket compared to the entitlement
obligations that President Obama inherited from every President of the United
States since FDR in the 1930s. The problem has been compounded under both
Democrat and Republican regimes, both of which have burdened future generations
with entitlements not originally of their doing.
Professor Niall Ferguson and David Walker are now warning us that by year
2050 the American Dream will become an American Nightmare in which Americans
seek every which way to leave this fallen nation for a BRIC nation offering some
hope of a job, health care, education, and the BRIC Dream.
Bob Jensen's threads on health care ---
http://www.trinity.edu/rjensen/Health.htm
Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/entitlements.htm
Debt ---
http://en.wikipedia.org/wiki/Debt
History of Money and Debt ---
http://en.wikipedia.org/wiki/History_of_money
Debt (booked by accountants) versus Entitlements (promises made that are not
yet booked) ---
http://en.wikipedia.org/wiki/Entitlement
"We've Always Been Deadbeats Debt is not a new American way," by Scott
Reynolds Nelson, Chronicle of Higher Education, September 10, 2012 ---
http://chronicle.com/article/Borrowed-Dreams/134146/
My father was a repo man. He did not look the part,
which made him all the more effective. He alternately wore a long mustache
or a shaggy beard and owned bell-bottoms in black, blue, and cherry red. His
imitation-silk shirts were festooned with city maps, cartoon characters, or
sailing ships. Dad sang in the car, at the top of his lungs, mostly obscure
show tunes. His white Dodge Dart had Mach 1 racing stripes that he had
lifted from a souped-up Ford Mustang. The "deadbeats" saw him coming, that's
for sure, but they did not understand his profession until he walked into
their homes and took away their televisions.
Dad worked for Woolco, a company that lent
appliances on an installment plan. When borrowers failed to pay, ignored the
letters and phone calls, my father would come by. He often posed as a meter
reader or someone with a broken-down car. If he saw a random object lying
abandoned in the yard, he would pick it up and bring it to the door as if he
were returning it. He was warm and funny, charming, but pushy. He did not
carry a gun, but he was fearless under pressure and impervious to verbal
abuse. If the door opened, he was inside; if he was inside, he shortly had
his hands on the appliance; the rest was bookkeeping.
. . .
In each case, lenders had created complex financial
instruments to protect themselves from defaulters like the ones I watched
from the car. And in each case, the very complexity of the chain of
institutions linking borrowers and lenders made it impossible for those
lenders to distinguish good loans from bad.
In 1837, for example, banks in the north of England
discovered that the unpaid "cotton bills of exchange" in their vaults made
them the indirect owners of slaves in Mississippi. In 2007, shareholders in
DBS, the largest bank in Singapore, found themselves part owners of homes
facing foreclosure in California, Florida, and Nevada. In both cases,
efficient foreclosure proved impossible.
In those crashes in America's past, perhaps a repo
man in a Dodge Dart with a million gallons of gas could have visited every
debtor, edged his way in, and decided who was good for it. (My dad did
accept cash or money orders for Woolco's goods.) But big lenders have
neither the time nor the capacity to act with the diligence of a repo man.
Instead, such lenders (let's agree to call them all banks) try to unload
debts, hide from their own creditors, go into bankruptcy, and call on state
and federal institutions for relief. Banks have also routinely overestimated
the collateral—the underlying asset—for the loans they hold. When those
debts go unpaid or appear unpayable, banks quickly withdraw lending; the
teller's window slams shut. A crisis on Wall Street becomes a crisis on Main
Street. Money is tight. Loans are impossible: Crash.
***
Scholarship on these financial downturns has its
own long and checkered past.
From the 1880s to the 1950s, scholars told the
history of the nation's economic downturns as the history of banks. Such an
approach was not entirely wrong, but it tended to focus on big personalities
like J.P. Morgan or New York institutions; it tended to ignore the farmers,
artisans, slaveholders, and shopkeepers whose borrowing had fed the booms
and busts.
Then, in the 1960s and 1970s, the so-called new
economic historians (or cliometricians) came along with a different story.
Using state and federal data, they tried to build mathematical models of the
nation's financial health. Moving beyond banks, they emphasized what they
termed the "real economy," by which they meant measurable indices of growth
and profit. Taking the nation's health like a simple temperature reading,
they used gross domestic product, gross income, or collective return on
investment. Of course, none of those figures had been measured directly
before the 1930s, and so the prognoses tended to vary widely.
Such economic models of financial health, however
scientific they looked, tended to be abstract representations of an economy
that was, in fact, more complex and more interconnected than they pictured.
The models, for example, often assumed that old banks were like modern
banks, sharing common accounting principles, or that because banks first
issued credit cards in the 1960s, they offered no consumer credit before
then. Drilling into historical documents for seemingly relevant numbers,
then plugging those numbers into a model of a world they understood rather
than the economy they sought to describe, the cliometricians often produced
ahistorical work. Hence, one economic historian assumed that American
barrels of flour sent to New Orleans were consumed in the South, though most
were bound for re-export to the Caribbean. Another calculated that railroads
played little role in America's economic booms by modeling a scenario in
which canals could have (somehow) crossed the arid plains into the Sierra
Nevada mountains.
Bear in mind, that same kind of intellectual hubris
about models of economic behavior had awful effects in the recent past.
Around 2000, Barclays Bank borrowed a simple diffusion model from physics
(called the "Gaussian copula function") to suggest that foreclosures would
have a relatively small effect on nearby property values. Economists tested
it with two years of foreclosure and price data and agreed. Billions of
investment in real-estate followed, often in indirect markets like
real-estate derivatives and collateralized debt obligations. By 2008 the
model proved shockingly inaccurate.
If some historians focused on the temperature of
the "real economy," economists were becoming obsessed with the money supply
as the single factor explaining most American panics. Again, a certain kind
of blindness to the history of debt and deadbeats ensued. The most important
book here was Milton Friedman and Anna Jacobson Schwartz's seminal A
Monetary History of the United States, 1867-1960 (1963). It urged economists
to steer away from stories of speculation spun out by Keynesians like John
Kenneth Galbraith.
How, according to Friedman and Schwartz, can we
separate speculation and investment? All loans are risky. The riskier they
are, the higher the return. Some investments will fail. Markets need to
clear, and those buyers who come along to sweep up bargains are not ruthless
profiteers but simply maximizers who make markets work. Thus, the pair
steered economists away from problems of risk and toward the problems of
state intervention. They were the prophets of financial deregulation.
Their story about past financial panics had the
advantage of suggesting simple solutions: Use the Federal Reserve to inflate
or deflate the currency. For them, financial crises were mostly monetary.
Thus, the 1929 downturn started with a financial shock and then was
prolonged by an overly tight monetary policy. After A Monetary History
became gospel, economics textbooks dropped their numerous chapters on
financial panics because the policy solution became so clear; economists
trained after 1965 know little about financial downturns before the Great
Depression.
Yet a tripling of the money supply has still not
fully pulled the United States and the rest of the world out of our current
financial crisis—suggesting that our problems, and all the previous ones,
were not just monetary. My dad would have pointed out that economists have
misunderstood the problem. Crises are mostly about productive assets—the
promises in his trunk.
Social historians (and I count myself among them)
tell a very different story about financial panics, but we have our own
blind spots. Since the late 1960s, we have often discussed the American
economy as if farmers were coherent families of self-sufficient yeomen
surprised by the market economy. That story of a sudden revolution misses
the early and intimate relationship between Americans and credit. It
overlooks how American stores provided consumer credit to farmers,
plantations owners, and renters who settled the West.
Thus, American social historians have used the term
"market revolution" to describe the period after the 1819 panic. Accordingly
market forces rushed in as repo men like my dad became vanguards of a new
capitalist order. The financial jeremiads of Jacksonian Democrats of the
1820s and 30s against bankers and paper money became the natural outgrowth
of frontier farmers' anger at a capitalism they had never seen before. But
the store system of Andrew Jackson's day borrowed practices from the
colonial store system that goes back to the 17th century, if not earlier. It
was how the fur-trading and East and West India companies prospered. John
Jacob Astor and Andrew Jackson were cut from the same cloth. They made their
fortunes from their stores, and their store system made settlement possible.
Part of the reason we overlook the importance of
credit in American history is our continued attachment to Marx's divide
between precapitalist and capitalist forms of agriculture. That misses the
relationship between farming and credit for most of the people who settled
America. The more I study panics, the more I am persuaded that the pioneer
American institution of the 18th and early 19th centuries was not the
homestead or the trapper's shack but the store, an institution that sold
foreign goods to farmers on credit, taking payment in easily movable settler
products like furs, potash, barrel hoops, and butter.
Rather than imagining some golden age of
subsistence, scholars in the Marxist tradition should look more closely at
anticapitalist movements in the wake of panics. I include here not just the
utopian and religious communities like Quakers, Shakers, and Oneidans but
also the early Mormons, the Grangers, and the Populists. Those people
understood what it meant for banks, and then railroads, to extend credit
through stores. Often regarding capital as a collective inheritance, they
built their own associations to replace such institutions of credit (and the
railroad was an institution of credit) with locally managed cooperatives
that distributed agricultural benefits in a way that served the broader
community. The temple, the elevator, and the cooperative were attempts to
break the chain of debt without demonizing capital.
From the perspective of business history, Joseph A.
Schumpeter argued that business-cycle downturns came from periods of
"creative destruction" in which new technologies undermined old ones.
Outdated technologies, with millions invested in them, became instantly
obsolete, leading to financial failures that cascaded to other industries.
While Schumpeter, who died in 1950, once persuaded me, I think there is a
mechanistic fallacy in the argument. Railroads, for example, have taken the
blame for the 1857, 1873 and 1893 downturns. While there may be something
there, the whole account seems reductive and technologically determinist.
For example, canals, the Bessemer process, fractional distillation of oil,
and washing machines are all revolutionary technologies that flourished
during the American panics, not before them. They did sweep away older
technologies, but rather than causing panics those technologies benefited by
the uncertainty that panic created.
In a very different camp, neo-Marxists like
Giovanni Arrighi and David Harvey betray a similar kind of reductive
history, a latter-day Schumpeterianism. Their work posits a "spatial fix," a
center of capitalism that then organizes and draws tribute from the rest of
the world. For the late Arrighi, it was a kind of pump that sucked assets
from elsewhere as states were forming throughout the sweep of centuries. For
Harvey it is an investment in a capital city (Amsterdam, London, New York)
and a new communication technology (telegraph, telephone, the Internet) that
drew higher profits from everywhere else. Dutch and British hegemony became
American hegemony after World War II. That suggests that these scholars have
not really considered the tremendous influence of the U.S. Federal Reserve
in reorienting international trade between 1913 and the 1920s. Their story
seems more or less political to me: American empire comes when Americans
claim victory in World War II. The economic material seems to be used in the
service of a story about the rise and decline of empires.
If we follow the money, the American empire emerged
during World War I, when the international flow of debt changed drastically.
For Arrighi and Harvey, the International Monetary Fund and the World Bank
are the pathbreakers of financial empire. But it is worth remembering that
those institutions were explicitly designed to restrain the dirty tricks of
financial empires of the 1920s and 1930s: No more American banks using
gunboat diplomacy in Peru; no more Germans sending tanks into Poland to
collect unpaid debts.
***
As a historian, I have learned the most about
financial disasters from long-dead historians whose work blended primary,
secondary, and quantitative material. Rosa Luxemburg, William Graham Sumner,
Frank W. Taussig, and Charles Kindleberger would never have agreed about
anything. Luxemburg, a renegade Marxist who read in five languages,
described how the dangerous mix of a hierarchical production process with
the anarchy of international trade could lead manufacturers to block free
trade and embrace higher prices for their raw materials in the wake of a
panic. Sumner, a laissez-faire Social Darwinist who argued that income
inequality benefited society, carefully explained how drastic economic
changes could follow from tiny changes in international trade deals. Put in
a room together, each would have retreated to a corner to begin throwing
furniture. But they and the others were storytellers who used a mixture of
sources. Telling a story by looking through the trunk of assets and watching
the damage afterward makes more sense to me than simple models of financial
contagion, money supply, technological watersheds, or global fixes.
My father died before I started writing about
financial panics, but my thoughts have grown out of our 30-year-long
argument about financial downturns. Not surprisingly, he disliked
"deadbeats," seeing them as the people whose false promises weakened our
country. He probably had a point, and no doubt the executives of Woolco
would agree. But I find much in them to admire, for defaulters are often
dreamers. Viewing America's financial panics through the lens of numerous
unfulfilled and forgotten debts that even the oldest banker cannot possibly
remember can afford a perspective my dad would have appreciated: with my
view from the Dodge Dart, the minute he rang the doorbell, when both debtor
and creditor prepared their stories.
Scott Reynolds Nelson is a professor of history at the College of
William and Mary. His book A Nation of Deadbeats: An Uncommon History of
America's Financial Disasters has just been published by Alfred A. Knopf.
Video
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September
10, 2011 ---
Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29
Debt versus Equity ---
http://www.trinity.edu/rjensen/Theory02.htm#FAS150
The booked National
Debt in August 2012 went over $16 trillion ---
U.S. National Debt Clock ---
http://www.usdebtclock.org/
Also see
http://www.brillig.com/debt_clock/
The unbooked entitlements have a present value between $80 and $100 trillion.
But who's counting?
Pending Collapse of the United States ---
http://www.trinity.edu/rjensen/Entitlements.htm
Should we never pay down (even partly) the U.S. National Debt or
Spending Deficit? ---
http://www.cs.trinity.edu/~rjensen/temp/NationalDeficit-Debt.htm
Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory