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Wednesday, March 9, 2011

Earth to New York Times: Governments Are Broke

It can't be ignored.

During a recent interview on Russia Today about the end of NASA’s space shuttle program, I said that the U.S. government was broke and Washington needed to curtail spending. However, I now stand corrected, at least according to the New York Times and the ubiquitous Michael Moore.

Declaring “broke” a “hollow cry,” the Times says that recent statements to the contrary by prominent Republicans are false:

It’s all obfuscating nonsense, of course, a scare tactic employed for political ends. A country with a deficit is not necessarily any more “broke” than a family with a mortgage or a college loan. And states have to balance their budgets. Though it may disappoint many conservatives, there will be no federal or state bankruptcies.

The problem, the Times says, is that government does not tax people enough, nor does it spend enough money.

Filmmaker Moore recently agrees He told protesters in Madison, Wisconsin, that the only problem is that taxes on wealthy people are too low:

America is not broke…. Wisconsin is not broke. The only thing that’s broke is the moral compass of the rulers.

Moore added that America is “awash in wealth and cash” and all that is needed to put the economy back on track is for the government to seize additional property from Americans who make more than he deems “moral.” (Note that Moore, a millionaire many times over through movies that trash capitalism, does not offer to give all his wealth to the needy.)

I suppose that both Moore and the Times are correct that if the government were to seize most or all of Americans’ cash and property holdings, the federal budget most likely could be balanced. For now.

The problem here is obvious on its face. If people had all their earnings confiscated by the State, they would no longer be willing to work and the government then would have nothing or almost nothing to tax in the future.

Borrowing to Pay Debts

There also is a huge problem with the Times’ mortgage analogy. The Treasury is borrowing money to make payments on previously borrowed money. If I were paying for my groceries with a credit card and borrowing money to make my mortgage payments, and it was clear my projected income over many years would not cover my expenses, that would be the very definition of “broke.”

No doubt the Times editors and Moore would counter that the government can ramp up tax rates and also create money to pay its bills (unlike you and me since the law forbids us to steal and counterfeit). But by forcing up taxes government would consume even more wealth produced by private individuals, and creating new money to pay its bills is a fraud that steals purchasing power from the rest of us.

I suspect these things are lost on the Times and Moore, who declared that wealth is “a national resource” to be confiscated by the State.

The wealth Americans produce does not come from a bottomless well, and it is clear that the current fiscal crisis is not due to government’s undertaxing the people. Rather the crisis exists because government spends too much, while taxation, regulatory, and monetary policy prevent economic recovery.

Any entity that has to borrow money to stay afloat because long-term income prospects are dismal is broke. True, government can temporarily hide the crisis by more borrowing and inflating, but in the end the bankruptcy cannot and will not be hidden.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.