The Berger Memoranda

If the U.S. Congress continues the current tax rates, won’t the deficit become bigger than if it raised the taxes for the rich people. Of course, it will. But the federal government budget deficit does not represent the gigantic problem that most people will tell you it is.

Deficits do not present a big problem for our national economy; government spending does.

I will address this topic of the deficit frequently, but for now I would like to clear up some of the myths that you hear about the deficit and debt problem.

First, you hear a lot of people say, “Oh, we should not leave this huge debt for our children to pay,” as if all the children in the U.S. will bear this burden equally. It simply does not work that way.

Remember, we have a progressive tax system. That means that everyone does not pay their fair share. In a system that has no “fair” shares, some pay more than others. A lot more. This means that our children will not have to pay this bill. Their children will. (That is, the children of the rich people.) It would take an unexpected change in the tax law for the entire burden to fall on all the children.

Okay, but shouldn’t the rich guys want to pay more taxes now so their own kids won’t have to pay in the future. Not really.

To understand this whole process keep in mind that the government has no money of its own. The money it pays out to one group of people, it takes from other people. Similarly when the government borrows money, the lender does not look to the government to repay the loan. The lender only cares that healthy victims exist from which government can steal to pay its obligations. This means that to understand whether government borrowing presents a problem we must look at how it affects the underlying debtor—in this case the rich guy tax payers.

First, let’s look at what a balanced budget would look like. The U.S. Government takes enough money from rich guys to cover the disbursements to recipients. Seems like a good way to run a business. But, this is not business; it’s the government.

Second, what does it look like if the government does not take enough to cover its disbursements?

In this case the government must borrow money—from the lazy rich guy and the Chinese Government (entrepreneur rich guy invests his money in productive assets) (see the green arrows). But, later the repayment problem arises (see the red arrows). The Government must repay the Chinese and the lazy rich guy. To do that it just raises the taxes on the rich guys—no problem for the rest of us.

But why should the rich guys not object?

At a given level of government “spending,” rich guys face two alternatives. Pay the government now, or pay the government later. (They get no third alternative.) The better choice always consists of pay later; even if the next generation must make that payment. To understand borrowing by the government presents we must examine and compare the alternatives.

When the government “borrows” money the rich guys retain more money than they would if government taxed them. Thus, government borrowing acts, in effect, as a loan to the rich guys—underwritten by the government. The government, in effect, borrows from the lazy rich guy and the Chinese to lend to the rich guys to pay their current tax liabilities. The rich guys pay back that loan sometime in the future by paying higher taxes.

Looking at a bit different picture might make this idea a little clearer.

The net flow of funds would remain exactly the same if the transactions were structured as follows:

1. The rich guys pay enough taxes to cover 100% of the government disbursements—voila, a balanced budget. (Blue arrows)
2. Entrepreneur rich guy borrows (green arrows) a chunk of the amount that he paid in taxes with the loan guaranteed by the government–which keeps interest down. (Lazy rich guy is a net lender)
3. Entrepreneur rich guy later repays the loans, with interest.

Government borrowing has the same effect as lending the rich guys part of their tax payment at a low interest rate. What enterprising rich guy would pass that up? None.

This explains why “supply-side tax cuts” seem to work. They let productive investors keep some of their own money longer. You could say the government debt represents debt capital in U.S. businesses waiting for repayment.

So, does this mean that government borrowing represents no problems at all? No. It represents another way to finance the real problem: government “spending.” The misallocation for resources caused by government redistribution of resources will eventually break the rich guys (or cause them to move). Then the government will have no source for the loan payments they have guaranteed.

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President Obama and the Democrats have lost their political will. Who cares about the voter uprising. Those people need leadership. After all, those rich people don’t really need all that money.  Think of the good that Democrats could do with all that money. The voters would thank the Democrats eventually.

But, since the President has caved for the time being, let’s pause and consider the possibility that taxing the rich might create some problems.

First, where did those rich people get all that money? They don’t have the power of the State; so they did not force other people to give them their money. Some people, of course, think rich people belong to the criminal element. But, how could that be? Doesn’t the Justice Department ferret out all the bad guys?

After a little research I discovered that, yes, the rich people do get their money from “little guys.” But, they use sort of a strange way to do it. They offer people products that  improve their lives and for which people pay voluntarily. After selling millions of these products, each for a very small profit, the lives of the buyers improve just a little and the rich make a lot of money. Hey, that does not sound so evil.

Second, even if those rich guys earned that money legitimately, they don’t really need it. If we take a few hundred thousand dollars from each of them, they would still get by. The State will spend their money more responsibly than they will.

Again, I did some research. Yes, rich people spend too much money on themselves. And, their purchase of luxury goods does not “stimulate” the economy very much. But even after too much spending they still have money left over. (Have you ever seen Brewster’s Millions. Spending all that money can prove difficult.) Since the rich always want more, they take that money and try to earn more with it. They buy drill presses and molding machines for their factories or they buy entire factories or they lend that money to some one who does.

Those factories make more of the products (at lower costs) that improve people’s lives. Oh, and they hire people to work in those factories. So their own workers can buy more of those products, which makes the workers better off, and the rich guys richer; they create more factories that hire more people; and the cycle goes on.

So, let me sum this up. The rich guys make a lot of money providing a little good for a lot of people. They spend a bunch of that money. The money they have left over they use to make themselves richer by buying equipment and factories and hire more people, which together provide more small amounts of good to still more people.

But that seems kind of dreary and it does take some time. Wouldn’t it work better if we just take money from the rich guys and give it to people to spend on themselves. It wouldn’t go on for years like the factories, but it would sure “give the economy a shot in the arm.”

Yeah, that’s better. Let’s feel good today instead of letting rich guys help us build a future.

Oh, about the taking. Would you hire thugs to break into your neighbors’ house and steal their money so you could give it to charity? Well you have.

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