The third way of reducing the rate of economic growth is “divert savings from financing production to financing consumption”. (Buechner Recording) Anything that can be done which, can divert savings away from financing, investment, production, additions to productive capacity-anything at all along those lines of taking savings, and instead giving them to people to finance consumption purchases will reduce the rate of economic growth. In an effort to further clarify a subheading anything that you can to do that will increase borrowing for consumption, and anything that you could do to encourage people to borrow for consumption purposes. Now suppose you really wanted to do that one really good way might be to give people a tax break on the funds that they borrow for consumption we could let them say deduct the interest they pay on there consumer debt. Now up until fairly recently in fact you could do that with credit card interest run up a huge credit card bill the interest was horrifying on credit cards but all the interest payments you paid on your credit card installment debt were deductible from your taxable income. So you got a little plus going along with that debt. Now that has been eliminated and that is one small step in the right direction but there is still a huge factor that is still working in a huge way. That is called mortgage interest. You can deduct all the interest you pay on your mortgage from your taxable income. A house is a consumer good it’s not a part of the economies productive capacity, and by this tax deduction for the interest you pay on your mortgage debt the government encourages people to incur that debt, and increases the demand for the particular type of consumption item. All of the labor, and the materials that go to build houses lumber, bricks, motor, concrete, pipes, all of it, that labor could all be used to add productive capacity in the economy instead it is being used to build houses. Now is that necessarily terrible? No it’s not necessarily terrible. But it does reduce the rate of economic growth. Another move in this direction the opposite not a plus is you reduce the penalties for bankruptcy. In the last five years the laws past significantly reduce the penalties for bankruptcy. So you declare yourself bankrupt you can keep your house, car, furniture, pool, and, the other house in Florida. What do you lose? I have family member that has just went through bankruptcy as far as I can tell nothing has changed in her life.
But in terms of diverting saving this is the champion government deficit financing. The deficit is: the deficit is the “difference between what the government spends, and what the government collects in tax revenues”. (Buechner Recording) If the government spends $900 billion, and it collects $800 billion in taxes the deficit is $100 billion the government is spending $900 billion, and only has tax revenues of $800 billion. It’s important to grasp this the government is actually spending $900 billion. The government only got $800 in tax revenues where is it getting that extra $100 billion since is really spending $900 billion. There really only two alternative places the government can get that extra $100 billion. One-way is to print the money. Print the money and spend it. Now if the government does that- that takes goes back to the first thing I discussed under the heading of how to reduce economic growth, and you have the government spending new money on consumer goods. I showed how that reduced economic growth. The other alternative is for the government to sell debt in the financial markets. For government to print up government securities, promises to pay-promising a certain interest return the principal due at a certain date, and sell these to people. These are very eagerly sought in the financial markets. This is a little different from the other three diagrams I have shown.
Table 11
As you can see I have added in producer goods and services. I have included again these two mutually exclusive alternatives A is the financial intermediaries loan out $100 billion in savings accumulated from all the savers. There are two possible ways these loans can go. They can be loaned for productive purposes to business, or they can be loaned to consumers I have divided this up ? goings to production increases in capacity ? going to consumers to finance consumption purposes. I have no idea what proper division is according to Buechner I am pretty sure that as a rule more of it goes for production. (Recording) The alternative however is that all it-the whole $100 billion goes to the government, and all of it is spend on consumer goods and services. This is a giant net sucking of wealth out of financial markets funds, which could and would be used to finance additions to productive capacity in the economy, but instead it goes to finance government purchases of consumer items. Now the statistics are very confused on this general subject of what’s been happening but the in general there seems to be a consensus that the real wage rate in the United States hasn’t risen since about 1974 the real wage rate. That doesn’t mean that households standard of living hasn’t risen because since that time we have had a massive movement into the labor force by the female population. The prosperity of the 1980’s which is attributed to Reagan statistically does not seem to be meaningful, and I think that has to be understood at least in part because according to Buechner Reagan multiplied the federal deficit by a factor of three or four, and we went from a $1 trillion dollar national debt- the national debt is a summation of all the deficits in the past added onto each other to where we are now approaching $6 trillion dollars. (Recording) This is pretty horrifying, but nonetheless the other side of this is anything you can do to discourage borrowing for production. The government’s regulations and controls in the economy are “extremely discouraging for people to borrow for productive purposes” or for people to produce anything. (Hazlitt 687) The whole environmental movement has not just increased regulations it has erected absolute prohibitions all over the place in the economy. Among other things for example it’s illegal to drill for oil wells in what the oil companies have identified, as the best locations where they might find oil you just can’t do it. In addition the “government has done many things to increase the risk of loss which also discourages borrowing for production” inflation makes the whole economy more uncertain, thus; increasing risk, together with the possibility of new regulations, and controls descending on you at anytime to destroy the product of your effort is also very discouraging. (Buechner Recording)
Conclusion
None of these methods none of the things I have discussed not one existed in the 19th century. There was no government spending out of new money in 19th century. Money was gold, and it was limited by the gold supply. There were no phantom goods in the 19th century. There was no phantom labor in the 19th century. There was no income tax in the 19th century. There was no corporate profits tax, or at least at the federal level. There was no social security. There was no inflation in fact Buechner points to a period which I would like to emphasize when the United States had 30 years out of this 40 plus year period when we were growing over 5% a year when the economy was actually deflating – that’s when the average price level was falling 1 or 2% a year. (Recording) There were no taxes on interest income, there were no tax breaks on consumption debt because there was no income tax, there was no safety net you had to build your own net. Bankruptcy was a disaster to go bankrupt was a true horror at that time. There was no federal deficit, there were no federal government regulations and controls, and very little on the state level. So if you want to increase economic growth I believe we need to move in that direction. I believe as a matter of political realism there is very little that is possible politically today. There is some significant concern about the deficit, and if the deficit could really be eliminated I think that would positive move. For today I believe it is much more important to fight for the philosophic preconditions which I have mentioned in the beginning on the paper which we are also losing, and if we lose those philosophical preconditions nothing originating in economics will make any difference at all. As Henry Hazlitt so aptly puts it “only minds corrupted by generations of misleading propaganda can regard this conclusion paradoxical.” (80)
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