Getting Past 19th Century Solutions on Debt Woes

Posted by Michael A. Kamperman on July 11, 2011

The following post was published in the Waco Tribune Herald on July 10, 2011.

In a Fourth of July guest column published in the Tribune-Herald and elsewhere, McLennan Community College history teacher Ashley Cruseturner suggested a “Grand Bargain” between Republicans and Democrats that would substantially raise taxes and significantly cut spending to bring the federal deficit into eventual balance, thereby preventing continuous increases in the level of federal debt.

At one point, Cruseturner says, “the United States is hurtling towards an unsustainable national debt debacle . . . we face an existential crisis.” Most people believe that this statement represents truth. However, what it actually represents is myth. According to Modern Monetary Theory, a sovereign nation like the United States that issues debt in its own currency can never become insolvent. Simply put, the United States federal government has the authority to print money any time it needs to. It can never run out of dollars.

Many people acknowledge this fact but argue that increasing the debt to “unsustainable” levels will lead to hyper-inflation and a collapse of the dollar against other currencies. They say we will wind up just like Greece. Despite three years in a row of trillion dollar-plus deficits and the Federal Reserve’s quantitative easing programs, these predictions have yet to become reality.

Unlike our country, Greece does not control its own currency because it adopted the euro. For Greece it is no different than being on the gold standard. Besides, Greece is not even the most indebted modern industrial country in the world. That honor belongs to the country economically most like us — Japan. It owes more than twice what we owe based on per-capita economic output.

Yet Japan has a strong currency. More importantly, Japan has the lowest interest rates in the world with its 10-year government bond yielding a scant 1 percent in interest. No one in the world is worried that Japan cannot or will not pay because Japan owes everyone yen.

What Cruseturner misses is that it is not the debt that represents a threat to our way of life. The threat comes from the medicine he proposes we take for an illness that doesn’t exist. His proposals are straight out of the 19th-century Austrian School of Economics that were wholeheartedly embraced and practiced by Herbert Hoover during the Great Depression. No post-World War II American government has practiced or proposed Hoover-style economics until now. The time to worry about balanced budgets and moral hazard is whenever the economy returns to full employment and is running on all cylinders.

Waco has one of the best Medicaid health clinics in the country in the Family Health Center. Not only is the clinic facing cuts from the state of Texas but now part of the “Grand Bargain” to raise the debt ceiling is cutting more of its funding at the federal level. This makes Waco weaker, not stronger. So does cutting teachers in our local school districts that struggle to educate disadvantaged children. All of these cuts are sold to us by both Democrats and Republicans as necessary based on a myth that is clearly false.

I live in the 21st century, and I do not want 19th-century medicine practiced on me. I also do not want 19th-century economics that similarly recommends cutting and bleeding as the way to make the weak stronger. Our parents and grandparents jettisoned this nonsense, and we need to jettison it too. The medicine we need to heal the economy is the opposite of what Cruseturner proposes. We actually need to lower taxes and increase spending to put the 25 million people in America who want a full-time job but cannot find one back to work.

We also need to fully fund Medicaid, keep our promises to everyone and put our teachers back in the classroom. Because the federal government has the money, the real moral hazard is to dismantle our society to satisfy the false prophets of a myth.

Mike Kamperman, who received his MBA from Baylor University, is president of Prometheus Wealth Management and author of “How America Can Escape the New Great Depression.” He formerly served as vice president of UBS Financial Services, formerly PaineWebber. He lives in McGregor.