Thinking about government spending and the Austrian school of economic theory, I’ve played a little mental game. I hope you can join me in it.
The question is: Where does government get money? The answer will show us why President Obama’s plan to economic recovery is really a recipe for ruin.
The places a government can get its money from are: taxes, debt, income, fines, or inflation. Let me be more specific.
Taxes are the most obvious way government gets its money. Taxes are money taken out of the collective pockets of the people and put into the collective pockets of the politicians. It is really a filthy way to get money if you consider thievery, robbery, and burglary filthy. After all, it is no different. Politicians may try to justify their deeds, but ultimately they are stealing when they collect taxes. That is why I, personally, hate all taxes and wish we had as few taxes as possible.
Debt is money borrowed. It is the favorite instrument of governments big and small to get money by promising to tax later to pay. Debt isn’t money created out of a vacuum, however. In the real world, there is only so much money to be lent. When government competes for that money, they are willing to pay any price to get it, since they can back their borrowing with the faith and credit of their potential taxpayers. Even though governments can pay exorbitant fees and interest on this kind of debt, there is ultimately a limit to it, and they can reach a breaking point where there simply is no more money to borrow. This happened last year, when several governments went to borrow and there were no lenders at any price.
The problem with government debt is that governments aren’t competing in the debt market like everyone else. They are the elephant in the room. They can outbid anyone, and do so without little worry. If they bring home a good deal, then they get a pat on the back. If they don’t, they blame greedy bankers. But by borrowing like this, they shrink the debt market. That means, less money for businesses and people to borrow to do things like expand their operations or buy a house on credit.
Income is money that government earns by participating as an actor in the free market. They offer some good or service, and they get paid to do so. Some people will put fees in this category. The problem with government participating in the free market in this way is that they can do things other people can’t. It’s like having the referee be a member of a team in a sporting match. It’s simply not fair. But government is more than a referee. It also writes the rules. It can call a foul for simply getting in its way in the free market. In short, a government that participates in the free market soon turns the free market into something else. We should do what we can to keep government off of the playing field and on the sidelines as a referee and a lawbringer.
That said, there are some markets where government is one of the participants, such as the justice market. In these markets, it’s very reasonable to have people who want to participate pay a fee to the government for its services. Ideally, the fees would match the cost of the services so that government doesn’t have to tax or borrow or inflate to provide the services.
Fines are money collected as punishment for crimes committed by individuals or corporations. Fines are a useful remedy, quite easy to collect and quite easy to impose. It’s a very friendly way to punish behavior that, while bad, isn’t completely dangerous. For instance, parking in the wrong spot or at the wrong times, or leaving your yard a mess, or behaving improperly in a free market without hurting anyone. The problem here is what government does with the fines, and what happens when politicians begin to use the fine system to raise revenue. I believe people have a pretty good sense of justice and will be able to identify when governments go too far.
Inflation is the last way that government can raise money. This is what happens when government simply prints new money and issues it. The inflation is a sort of invisible tax. It’s a tax because it reduces the value of all the money everywhere at the same time. However, there is another powerful force called deflation. That’s the force that drives the value of money up as demand for it increases due to an expanding economy. Deflation can be worse than inflation since it discourages people from behaving in ways that will help the economy grow. If government prints money at a rate that keeps the value of money constant, then they can raise money without hurting anyone. Let me repeat this: If government prints money at a rate that keeps the value of money constant, then they can raise money without hurting anyone. This is the “secret” path to success that our Founding Fathers discovered a long time ago. It’s why they didn’t want the banks to be allowed to expand the currency through fractional reserve banking. It’s why we didn’t have a Fed until 1913. It’s how President Lincoln paid for the Civil War without collecting a single penny in taxes. It’s how the Continental Congress paid the soldiers in the Revolutionary War without borrowing a penny.
In conclusion, there are several ways government raises money. Of them, taxes are the most evil, akin to thievery and robbery. Income puts government, which should be a judge and lawgiver, as a participant in the free market, which takes the freedom out of the market. Borrowing puts pressure on businesses and people who want loans to expand their business or buy a home. Fines are suitable only for punishment and not as a means to raise money. Inflation at a proper rate will create money without causing any harm to the people.
These basic ideas are what powers the Austrian school of economic theory. It dictates a government that:
(a) Limits taxes to the absolute minimum, preferrably zero.
(b) Limits borrowing to nothing by balancing the budget each year, and thus limiting spending to almost zero.
(c) Issues currency to keep the value of money flat.
(d) Imposes reasonable fines as punishment and not as a means to revenue.
(e) Limits participation in the free market and thus income.
The problems with the Keynesian economic though is that it simply doesn’t work and has never worked. Keynesian economic thought, the theory that is behind the idea that you can spend your way out of a recession, doesn’t properly account for the market forces that government borrowing bring in to play. These forces are devastating. Unfortunately, Keynesian economic thought is tempting for politicians because it gives them a good excuse to spend and spend and buy their way into the hearts and minds of the people. This is the economic theory that the democrats in congress, along with some misguided republicans, believe in.
We must demand that congress stop acting according the Keynesian school of thought. It is dangerous to our freedom and our economy. We must demand that government actually reduce its size year-to-year and not grow.