Many people believe that deficits are a bad thing. However, they all want something for nothing. Give me, give me, give me seems to be the battle cry; me first and then deal with deficits. Politicians listen but don’t do anything. Surprised yet? No, right? So, what is the cure for deficits?
The origin of deficits
We have seen in previous lessons that politicians need to keep spending all the time. Many decades ago this wasn’t that bad since little spending provided a relatively high amount of votes. However, as this spending became routine, higher spending was required. This spending overtook all tax income and so politicians resorted to borrow. The more they borrowed, the more they spent. It all worked out ok until the levels of interest that they had to pay for the old debt became too large to cover even with taxes. They were trapped. They could not pay existing debt interests and spend at the same time. The only solution was to keep borrowing. Result? Increased and permanent deficits. This is the current scenario we live in. Government debt is in great measure the culprit of deficits.
Taxes are not the cure for deficits
There is a time-honored fairy tale that almost all politicians love and fell free to spread around magnanimously: Taxes are the cure for deficits. Let us dismiss this myth once and for all: taxes are not the cure for deficits.
We have explained in previous lessons why politicians need to increase spending in order to stay in power. It is job security through spending. Parkinson’s law is true: expenditures will rise to meet income. It is simply impossible to eliminate deficits by increasing taxation. Political necessities so dictate.
Expenditure levels in most countries are so high now days, that even a monstrous increase in taxes won’t make much of a difference. This is so because of the monstrous debt they have and the monstrous interests they need to pay to “service” such debt.
Alas, this won’t stop a politician who has never seen income he / she did not like. From politicians’ perspective, increasing taxes is a viable option because it allows them to retain their jobs for one more political cycle. What happens after that is not their problem. They know that extra taxation won’t have any effect on deficits. However, a cent is a cent. A cent taxed is a cent that can be spent.
In general terms, constant increases in taxes are simply suicidal. No country can operate under such conditions. The only guaranteed outcome is an economic depression at best and a crash at worse. This “solution” is far worse than the “problem”.
Taxation removes not only the means to consume and have a higher quality of life, but it also removes the capacity to save, which is the engine that drives private enterprises, which improves our quality of life. And all for what? So that politicians can waste this capital and leave us with no benefits or services. The medicine has just killed the patient.
Increased taxes are most definitively not the cure for deficits.
Inflation is not the cure for deficits
Yes, if the debt of a country is denominated (i.e. specified) in its local currency, then it is possible to destroy that debt simply by inflation. It is quite simple, really. A government prints money and pays off the debt with worthless currency. Voila! The debt and the deficits are gone! The only problem is, the process also destroys the country’s economy. The medicine has just killed the patient.
Although it is true that moderate inflation is preferable to tax increases, this is not the solution. In a scenario of high inflation, people can still spend their earnings, however depreciating they may be. In a scenario of higher taxes, people have nothing to spend at all! So, yes, inflation is preferable to tax hikes, but it is not the solution to deficits.
Legislation is not the cure for deficits
It’s been tried before, you know? Many countries have laws limiting the amount of deficit a government can sustain or demand a balanced budget. The problem with all these laws is that they are paper tigers. All roar and no teeth. It only makes sense. Politicians know that they need to keep spending, what incentive do they have to actually cut spending in absolute terms? They don’t feel like losing their jobs overnight. So they create meaningless laws with back doors, special clauses and off-book accounting practices. The result? Nothing, deficits keep growing as usual. The medicine is just placebo (i.e. a pill without medication) and the patient continues to die.
Budget reduction is not the cure for deficits
This one has also been tried before and failed for the very same reasons. For politicians, no spending money means no job. Therefore all budget reductions are either token reductions or worse. If you look closely you will notice that all budget reductions have grandiose titles and very little substance and then… then… you have the “compensations”. For each reduction you will find a compensation buried deep into the regulations. This compensation is intended to ameliorate the “blow” budget reductions will have on one or other vested interest group. The only problem is that all these compensations are usually larger than the reductions they compensate for! And so the circus goes on and on. Besides, there is no way that government employee unions will allow any meaningful cut without a counter-balancing increase. This is a fact of political life. Meaningful budget reductions are simply a physical impossibility. Just like traveling faster than the speed of light.
What is the cure for deficits?
Simple. Get rid of all governments. Since governments are the root cause of deficits, the only workable solution is to get rid of governments. Let us be clear. Governments were set-up to be independent from people, not to respond to people’s wishes. This is so by definition sine a representative of “the people” cannot represent people with conflicting interests. A lawyer can’t. A judge can’t. Only politicians can! It is not possible to split a single vote. Politicians know this and they also know that this fact makes them effectively independent from people. As such, budgets and the deficits they bring can be brought independently from people’s wishes. This is another fact.
There truly is no other way. Only the extinction of all governments will bring the extinction of all deficits and with it a better quality of life.
This is the truth. The sooner you accept it, the sooner your life will make more sense. Of course, you may choose to live in delusion. This is most certainly your choice, but then, don’t complain about the consequences.
Note: please see the Glossary if you are unfamiliar with certain words.
