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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The census, required by the Constitution, has also become one of the many boondoggles devised by the master mind politicians. Imagine hiring two million people to count three hundred plus million people. Using my calculator, I figure that each census taker must count between 150 and 200 people (which also amounts to counting less than one person per day). And remember, most of the count will be gathered by mail. (They might only need to visit one person a week.)

In addition, the government has been spending your money to advertise the census. (Don’t they teach people about the Constitutional requirement in the expensive government schools?) In at least one of the ads they explain that the census is important to help your community get its “fair share” of federal giveaways.

If I follow their convoluted logic, the government spends your money to count you and to convince you to count yourself, so that you can get your share of somebody else’s money. (I know, I can’t write it so it makes sense.)

Also you want to have your nose counted so that the group of oppressors you support can have the power for a while.

Only one legitimate reason exists to let the government count you: it’s required by the Constitution.

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In 1831 Alexis de Tocqueville, along with his companion Gustave de Beaumont, traveled from France to the United States for the purpose of—ironically—studying the U. S. prison system. Democracy in America, the book in which he recorded his observations from his 9 month tour, has provided a background for many discussions about democracy even to this day.

In Democracy in America, de Tocqueville raises the possibility of a tyranny of the majority under democratic forms of government. Although he saw a risk of that form of tyranny in the U. S., he also observed elements of the republic structure of the United State form of government that would mitigate the tyranny of the majority. In fact, he titled one of his chapters “Causes Which Mitigate The Tyranny Of The Majority In The United States.”

Over the years, and particularly in the 20^th century, the U. S. Government—abetted by it citizens—has swept aside the protections against the tyranny spawned by democratic forms of government. The concerns expressed by Alexis de Tocqueville and the fears of many of the Founding Fathers have come to pass in ways they could only imagine. We have created the tyranny of the majority of the minority.

With last night’s vote on “healthcare” the U. S. Government Congress enacted another triumph of tyranny. 219 people (in essence only 8 people), not even elected by most citizens, placed further limits on the liberty of over 300,000,000 Americans.

I don’t see this as an issue of Democrats vs. Republicans. Both parties believe in more oppression. We just got the Democrat form of oppression rather than the Republican form. I favor neither.

Contrary to popular misconception, the United States of America does not need “healthcare” reform of any sort. It needs, rather, the repeal of all existing legislation that hampers the emergence of a free market in all forms of care for the sick and needy.

To those who argue that a free market will not care for these people I have two responses:

First, you cannot provide any empirical evidence to support your claim. A free market for these services—or any other for that matter—has never existed in this country.

Second, in a free market both parties win in every voluntary transaction, for every product/service. In any government controlled market the monopoly force of government picks winners and losers. In such a system—in which winners pick the pockets of losers—we all lose in the long-run. These statements apply to “healthcare” as much as any other service.

If you favor any form of legislation regarding “healthcare,” you don’t favor liberty or economic efficiency. You favor the freedom getting what you want and the freedom of others to get what you want them to get. You favor a misguided view of economic efficiency that practices stealing from healthier and more-productive people to support less-healthy and less-productive people. These forms of freedom and economic efficiency will eventually make you less free, less healthy and less productive.

Cloaked in altruism, tyranny and oppression in the U.S. of America takes on a particularly sinister character. It creates the unseen tyranny of one citizen over another.

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President Obama and Congress want to restrict your market choices—your freedom—in order to gain the votes of people who don’t think the planet can take care of itself. The planet did okay for billions of years before humans showed up, and it will do just fine long after we destroy ourselves.

So should government exercise its heavy hand to protect us from ourselves?

I don’t think so. In general governments have destroyed more lives over the centuries by many times the number destroyed by free men acting on their own volition. Should we turn the management of our global resources over to entities that don’t have a swell record in protecting lives?

But have free men, in the pursuit of their own interests, caused some unintended consequences that could harm other humans? Actually, I think so. But can government do better in the future? I think not. The evidence lies hidden in the past.

In spite of the progress of humanity, government has caused a lot of waste—a huge source of environmental pollution.

• Expansive monetary policy has caused markets to make bad investments and waste resources.
• Regulations that treat special causes as common causes require the waste of resources by regulating segments of society that don’t need it.
• Government spending always wastes resources, because it cannot calculate.

Eliminate government interference and the market will save resources otherwise wasted by government—a boon to the environment.

If the economic argument does not sway you, how much more oppression will you willingly suffer in order to have a negligible, and questionable, improvement in the climate? Remember we won’t exist forever. Wouldn’t you prefer to die free?

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Congress does have another alternative to the reconfirmation (or not) of Ben Bernanke.

They could file federal counterfeiting charges against him under Article I, Section 8, paragraph 6, of the U. S. Constitution[i].

That action, however, could create much bigger problems—for Congress, the Executive Branch, and a few private citizens.

They would have to indict all living Fed chairmen, all living bank presidents, and every living member of Congress who voted for banking legislation, and any living President who signed that legislation into law. Imagine that, Congress indicting itself.

Oh, what a mess that would make. Better to stick with my first option: get government out of the money business.

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[i] U. S. Constitution, Article I, Section 8, paragraph 6: The Congress shall have the power…To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.

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That is a question. (Certainly not the question.)

Amongst those few Americans who have even heard of him, much less those who know what job he holds, opinions about whether Congress should reconfirm Ben Bernanke as the Chairman of the Federal Reserve Board of Governors seems distinctly divided. Some say, “Definitely confirm him. He has done a marvelous job. He saved the entire US economy from disaster.” Others say, “His rule over the Federal Reserve System has been a complete catastrophe. He should be fired and shipped back to Princeton.”

I say, “What does it matter?”

Our monetary problems—oh, yes, we have monetary problems—arise from a flawed banking and monetary system. Congress originally designed it to inflate the money supply, and it does exactly that. It does not matter who we put at the helm of the Fed. We have had creeping inflation (increasing money supply) since the implementation of the original design in the Federal Reserve Act in 1913. The money supply has increased during the tenure of every Fed chairman.

The flawed banking and monetary system, which extends beyond just the Federal Reserve, consists of four interacting components:

1. Fractional reserve banking allows banks to create new money from nothing.
2. The Federal Reserve Banks feed the expansionist banking system through reserve creation (also from nothing.) Most important, the Fed has increased banks’ money making capacity by reducing reserve requirements over the years to almost nothing.
3. The Federal Deposit Insurance Corporation (FDIC) (along with other government guarantees) has supported the shell game of fractional reserves. Depositors don’t care that banks have no money to support their money.
4. The Constitution mistakenly gave Congress the power to regulate the value of the Nation’s money—a power Congress passed on to the banking system.

Congress should not even consider reconfirming Ben Bernanke. They should eliminate his job, as a part of a sweeping transformation of the banking system:

1. Close the Federal Reserve Banks.
2. Eliminate all forms of deposit guarantees.
3. Repeal Article I, Section 8, paragraph 5 of the Constitution.[i]
4. After taking the preceding three steps, the market will fix the fractional reserve system.

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[i] U. S. Constitution, Article I, Section 8, paragraph 5: The Congress shall have the power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;…

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This morning I saw a video clip in which Labor Secretary Hilda L. Solis said (I paraphrase), “If you have a way to create jobs, I’d like to hear it.”

Still suffering from the infrequent urge to write letters to people in political power, I considered, briefly, writing to the good Secretary with a well defined plan for job creation. The desire to write another letter to Washington left me quickly for two reasons. First, I don’t find it too rewarding to write to people who either don’t read or don’t understand what I write. Second, I couldn’t think of anything eloquent to write.

So, I thought I would post a thought or two here.

Actually, I could think of something to write; I just had difficulty with the “eloquent” part. I can state what Washington should do to create jobs quite clearly:

Cut spending and cut taxes.
Then cut spending and cut taxes again.
Then cut spending and cut taxes again.
Then cut spending and cut taxes again.
Until you spend and tax no more.

See; not too eloquent.

I could have expanded the explanation a little by saying:

Reduce regulation.
Then reduce regulation some more.
Then reduce regulation some more.
Then reduce regulation some more.
Until you regulate no more.

But even that addition does not make it read less like a rant than a concise statement of how to create jobs.

Yet, no one could make a more concise statement of how to create jobs. It just does not read like the long winded explanations given to justify all the job killing programs designed in Washington.

Briefly, for the uninitiated, cutting government spending and taxes and reducing regulation will do one thing that creates job. It will free up capital confiscated by politicians (I don’t mean money; I mean capital). More capital leads to more productivity, more jobs, and higher incomes.

Until politicians learn the importance of capital accumulation to the health of the business owners, workers, and consumers in the economy they will continue to spend and tax; and we will continue our slow economic decline.

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