A week ago, Dr. Samuel Gregg addressed an audience here at Acton’s Grand Rapids, Michigan office on the topic of “Europe: A Continent in Economic and Cultural Crisis.” If you weren’t able to attend, we’re pleased to present the video of Dr. Gregg’s presentation below.
In a recent article in the Washington Post, Juan Forero and Michael Birnbaum recommend that in the face of the looming specter of Greek debt default, Europe may learn a few lessons from South America. In particular, they point to the good example of Uruguay and the bad example of Argentina.
According to the authors,
In a story that may provide a lesson for Europe, one country, Uruguay, that was on the edge of financial oblivion organized a fast, orderly and negotiated response that revived the economy and ended a run on banks. Another, Argentina, spiraled into a chaotic default and remains a pariah in world financial markets.
The article lists a variety of reasons, such as tax evasion, political stagnation, and civil unrest, with regards to why Greece is in danger of becoming the next Argentina. There is one aspect, in particular, though, that sheds some interesting light on current monetary practice. According to the article,
Greece is hamstrung by its ties to the euro, which it cannot devalue to make its exports cheaper, and leaving the currency zone might prove even more painful.
Though currency debasement has been possible since time immemorial, it has become easier ever since the “Nixon Shock” of 1971, when the United States ended its tie to the gold standard, affecting every other nation which had tied its own currency to the U.S. dollar for the sake of stability. However, from that point on, most countries have been operating with purely fiat-based currency; a government’s central bank can print as much or as little money as they desire, since its value has no stable grounding. (Grounding the dollar’s value to a specific amount of gold prevented the U.S. from printing more money than gold that it could be exchanged for.)
In a recent article in the Journal of Markets & Morality, James Alvey highlights the analysis of James Buchanan on the ethics of public debt and default. With regards to default, Buchanan identified two common means: open default or concealed default through inflation. By inflating its currency, a country can, in effect, cheat its bondholders out of the amount promised to them by repaying its debts with debased money. To do so is effectively concealed default. Notably, Alvey writes, “Buchanan says that the U.S. government did ‘default on a large scale through inflation’ during the 1970s,” the very decade in which we left the gold standard.
What is fascinating about the current crisis with Greece is that its central bank does not have sole control of the euro. Despite being a fiat currency, its decentralized nature gives it a certain stability. Concealed default is not an option for Greece, forcing it to make the hard decisions necessary to avert defaulting on its debt or to do so openly.
For more on the history and moral implications of currency debasement, see Juan de Mariana, Treatise on the Alteration of Money, recently translated and published by Christian’s Library Press.
Acton director of research Samuel Gregg offers his thoughts on last night’s GOP Roundtable in this NRO Symposium. Gregg thinks the debate offered an important alternative to the government-driven economy talk that fills the news every other night of the week.
In a week in which two American economists from the non-Keynesian side of the ledger received the Nobel Prize for Economics, last night’s GOP debate gave us some insight into the depth and character of the various candidates’ free-market commitments and the different policy priorities which flow from the various forms of those commitments.
But if the ideas were strong, they were a reminder of separation between our free market ideals and our considerably less free economy:
For the most part, the candidates focused upon the institutional background that either impedes or facilitates economic growth: the regulatory environment, tax levels, trade policy, monetary policy, etc. Listening to the responses was a salutary reminder of the gap betweenAmerica’s free-market aspirations and rhetoric, and the rather different Eurosclerotic economic reality that has slowly envelopedAmerica– and not just over the past three years, but over several decades.
The only way we’re really going to get our economy going, is by addressing entitlements.
The surprising omission was substantial discussion of the issue of welfare reform and the related question of America’s public debt. While Obamacare was continually criticized because of its costs, that’s only part of the picture. Substantive entitlement reform is indispensable if we want to significantly reduce the spending and deficits that threaten to suck the life out of America’s economy. Addressing this subject is of course very politically risky because far too many Americans are more attached to the welfare state than they care to admit. But if fiscal conservatives aren’t willing to tackle this issue, then who will?
Acton’s tireless director of research Samuel Gregg has a post up at NRO’s The Corner in reaction to yesterday’s bad poverty numbers (46.2 million Americans live below the poverty line now—2.6 million more than last year). Gregg is ultimately not surprised about the increase, because not only does the American welfare state produce long term dependence on governmental support, but the huge debt incurred by poverty programs tends to slow economic growth.
It is now surely clear that the trillions of dollars expended on welfare programs since the not-so-glorious days of the 1960s have not apparently made much of a dent in significantly changing the ratio of Americans in poverty.
In some instances, America’s welfare apparatus may have prevented some people (especially the elderly) from falling into abject poverty. There is, however, very little evidence that it has helped millions of people out of relative poverty. There is also plenty of data to indicate that many welfare programs have produced intergenerational dependency on the state—a point that even Bill Clinton seemed to have grasped by the mid-1990s.
Gregg then warns against the temptation to double down on government-as-the-answer, arguing that we don’t have the fiscal leeway to experiment as we did in the 1960s.
We need to keep these serious failures of America’s welfare state in mind because these new poverty numbers will almost certainly be used as an argument by some people of good will (as well as those whose motives are far less noble) to resist any reductions in welfare spending, despite America’s far-from-healthy debt and deficit situation. Yet the sheer size of government spending on entitlement programs (by far the biggest item in the federal government’s budget) makes cuts in these areas inescapable if—I repeat, if—our political masters are serious about wanting to balance the government’s books.
Indeed, such cuts are assuming an ever-increasing urgency in light of the studies which continue to appear indicating that crushing levels of public and government debt run the risk of significantly impeding growth. That’s worrying, not least because a slowdown in growth will hurt those in poverty far more than the wealthy. Strong growth rates are one of the most powerful antidotes to poverty – just ask anyone living in mainland China or India. More welfare spending is simply not the answer.
Full post here.
In the discussion of whether the problem with our national public debt is a question of receipts, outlays, or both, I linked to a helpful set of graphs from Anthony Davies, an economics professor at Duquesne University. This data shows that even though a variety of tax rates have changed a great deal over the years, the federal government has basically taken in receipts within the range of 16-20% of GDP over the post-WWII era. If you haven’t looked at this presentation before, you should do so now.
And today, Grove City economics professor and AU faculty lecturer Shawn Ritenour links to another chart, which compares these receipts against historic federal outlays (or spending). He notes (and refutes) Joe Weisenthal’s contention that “any politician who says Washington has a spending problem, rather than a revenue problem, is speaking from a position of anti-tax ideology, rather than empirical data.”
But I think if you look at the history of receipts and outlays a bit closer, you’ll see that the variance in receipts over the last decade are well within the historical norms. But the variance in outlays over that period isn’t outside the norms, either, in the sense that it continues a disturbing trend after 1970. (The data for current and future years is estimated and gleaned from sources here.)
There used to be some correlation between the red and blue lines. But not in today’s Washington.
Again, given this historic perspective, I think it’s hard to blame the blue line for the current debt levels. Keep in mind too that since these figures are a function of GDP, as the economy grows, other things being equal so too does the spending and receipts of the federal government.
In addition to the larger versions of the graphs clickable above, you can download this set of graphs in PDF form here, and visit our “Principles for Budget Reform” page to read more related commentary.
My editorial, “Intergenerational Ethics and Economics,” appears in the latest issue of the Journal of Markets & Morality (more details about that issue here). In this short piece I explore some of the implications and intergenerational consequences of public debt. For this I take my point of departure with the much-discussed “A Call for Intergenerational Justice,” but I also point out the importance of considering opportunity cost and how that concept has been applied in an analogous conversation about climate change. Focusing particularly on the current generations of workers, however, I observe:
Younger workers have not had as much time in the workplace to earn wages, collect benefits, and save, as those who have been working for decades and are nearing or have already entered retirement. As we learn from what has been called the “miracle of compounding interest,” small deductions of available capital at earlier points in time have major consequences for long-term growth.
In a recent piece for City Journal, Nicole Gelinas reflects on the federal government’s move to take on troubled securities from private firms. She writes,
The politicians we elect have three choices—the same choices they had four years ago. They can admit that this debt isn’t worth much and allow the financial sector to bear the consequences. They can hope that the Fed tries to use inflation to raise the price of everything else, making the debt seem a lighter burden in comparison. Or they can maintain their silence, letting the financial sector take another half-decade or more to make enough money on new ventures so that it can finally admit what it should have admitted back in the fall of 2007: bad debt is never good. At least the Fed acknowledges this strategy: it says that it’s using “time” to manage toxic securities and “minimize disruption to the financial markets.” But prolonging government control of financial markets just prolongs investors’ uncertainty.
Her conclusion underscores what I contend in the editorial about the importance of opportunity cost and the intergenerational effects of (in)action: “As the Fed notes, the cost of this policy isn’t measured in dollars but in something more precious: time. Washington’s refusal to confront the debt problem is costing millions the most productive years of their lives.”
Also in the current issue of the journal, James Alvey explores “James M. Buchanan on the Ethics of Public Debt and Default.” Buchanan has a good deal of interest to say on these questions, and Alvey concludes that “Buchanan’s favorite policy agenda, constitutional/legal limitations on public spending, deficits, and debt, needs to be revisited.”
In Crisis Magazine, Acton Research Director Samuel Gregg has a new article that looks at how Catholics reflect on a wide range of financial questions ranging from the federal government’s fiscal woes to consumer debt to a fragile banking system.
Today one looks in vain for Catholic thinkers studying our debt and deficit problems from standpoints equally well-informed by economics and sound Catholic moral reflection. We don’t, for instance, hear many Catholic voices speaking publically about the moral virtues essential for the management of finances such as prudent risk-taking, thrift, promise-keeping, and assuming responsibility for our debts — private or public.
Instead, one finds broad admonitions such as “put the interests of the poor first” in an age of budget-cutting. The desire to watch out for the poor’s well being in an environment of fiscal restraint is laudable. But that’s not a reason to remain silent about the often morally-questionable choices and policies that helped create our personal and public debt dilemmas in the first place.
One Catholic who has proved willing to engage these issues is none other than Pope Benedict XVI. In his 2010 interview book Light of the World, Benedict pointed to a deeper moral disorder associated with the running-up of high levels of private and public debt. The willingness on the part of many people and governments to do so means, Benedict wrote, “we are living at the expense of future generations.”
In other words, someone has to pay for all this debt. And clearly many Western Europeans and Americans seem quite happy for their children to pick up the bill. That’s a rather flagrant violation of intergenerational solidarity.
Read “Debt, Finance, and Catholics” on the Crisis Magazine website.