Fiscal Policy for Dummies

The disaster in the US is the long run debt created by war. This debt came at a time when the US could not even afford to go to war. I remember the talk back in 2003-2004 about whether wars were good for the economy or bad for the economy—as though war were an economic policy.

For starters war is a disaster for the economy in the long run. Here long run means something along the lines of say Vietnam or presently the war in Iraq and Afghanistan. The real crunch of these wars will remain in the economy long after the wars have ended. This was most obvious when the Vietnam War ended and Jimmy Carter stepped into the White House and met spiraling inflation combined with rising unemployment, while at the same time the US faced a new enemy in relation to the economy—namely the nation had become a net importer of oil instead of net exporter of oil and the oil producing nations of the world had formed a cartel (OPEC) which was itself using a system of price fixing—thus making the price of oil extremely expensive. This change had a drastic effect on our structure of manufacturing and made the ability of firms to update their factories impossible and thus in the long run they lost their competitive advantages but also they lost technological advancements as well—thus lowering our technological edge in relationship to the world as a whole. Of course we were lucky in terms of certain kinds of technology but due to cost of the military industrial complex, the technology we are in possession of is losing its position in the world and we are becoming ever greater slaves of the social welfare system that aids the military industrial complex at the expense of the society as a whole. (It is stagnating just as it did in the communist bloc)

While the US was fighting the Vietnam War it would have been far wiser to have been involved in attempting to save our consumer electronics industry and thus stave off the onslaught that came from Japan and which we now see coming from China and Taiwan as well as from South Korea, Thailand, Malaysia and Indonesia. The war did not serve our interests and yet it made our industry all that more dependent on the military industrial complex—which is not a free enterprise system but rather a form of socialism which breeds not welfare for the nation but rather is supported at the expense of welfare for the people while it is used as a hypocritical argument against social welfare in general.

If one looks at something like national health care then in the long run it is a means to lower costs for the entire society in relation to what we spend on healthcare today (somewhere in the neighborhood of 5-7% of the GDP could be freed up to use on other more lucrative things while offering 100% healthcare to 100% of the population), but in the short run it will mean a serious hike in debt because one must first establish a decent system, but it is a system that improves in the long run and achieves higher degrees of economic efficiency. The hardship in such a system is taxes. The system must be paid for with tax payer money so as to minimize the charge for using the system (Businesses must also be taxed). The budget for such systems as health care and higher education are major burdens on Europe, Canada, New Zealand and Australia—but these systems offer enormous and justified benefits (the overriding majority of the population in these nations support the national healthcare system as well as the education system) and they can laugh at us because they know that those refusing national health care system on financial arguments are liars. The question is about attitude and one’s sense of community and solidarity—our sense of community is basically fuck’em and thus our high level of poverty and an ever increasing population of individuals who live without any form of healthcare whatsoever.

Another aspect of war in the long run is that is has serious consequences in relationship to the US dollar. When the US fought the Vietnam War the effect was like that of Keynes when the government spends money. To keep it simple it will force the interest rate up. But the major impact in the short run is an expansion in the economy—because people will get work from those sectors that benefit from the Government spending and this will increase consumption. But in the long run it will mean that as interest rates rise the economy will contract, all business ventures will become more risky because it costs more money to borrow. The other aspect is that at the time of Vietnam War the currency exchange system had fixed rates—thus if the interests rates go up the value of the currency will also go up and this mean the US goods sold abroad will become more expensive and imports cheaper—thus the a trade deficit will arise.

Today, however, in Iraq and Afghanistan Wars the US faces flexible exchange rates which means when the country goes into debt a short run affect will be that the dollar plunges, which in turn means that US goods become cheaper abroad, while foreign goods become more expensive. In the long run however those nations who sell goods in the international market that are priced in dollars (for example oil) are forced to jack up the price to compensate for the fall in the value of the dollar. A nation whose economy is almost solely determined by the export of oil must raise prices or face a national disaster. If the dollar falls in value by a half then the international market will see prices in those goods priced in dollars double. This means we get hurt at home while we wreck havoc abroad, thus creating geopolitical animosity towards us (hardly a means to winning hearts and minds, which can only be won through responsible government!)

Long Run and Short Run are relative terms. The means used by Ronald Reagan to counter the disaster of the Vietnam War (we were still suffering the long effects of Vietnam when Reagan took office in 1980) was to go into black hole debt which in turn made US goods abroad cheap. Because the dollar now floated it was incredibly weak. The consequences were that the world interest rates skyrocketed—double digit interest rates (at least in Europe during the 1980’s). This in turn caused massive risk on all business ventures which in turn resulted in a worldwide recession. Perhaps a positive aspect was that many members of OPEC had borrowed large amounts of cash and suddenly they found themselves owing larger and larger sums of cash while global demand for oil collapsed which in turn caused the oil price to collapse (OPEC was seriously hampered) The consequences in the US of Reaganomics in the long run were wide spread poverty while crime soured out of control (he increased the number of permanently impoverished dramatically and offered us a prison state—which we can’t afford). On the other hand he also created a number of booms so that one part of the population experienced a temporary raise in wealth while another part experienced a permanent lowering in wealth. Ultimately the consequence of Reaganomics was a worldwide recession—but his saving grace was the collapse of the Soviet Union which in a way similar to the end of WWII left the US as a “winner” of the so-called Cold War. Unfortunately the US has failed to use its “winner” position to rebuild.

This ability to rebuild could have only been accomplished by building down and removing the worldwide forward deployment of US troops, closing bases and bringing the cost on the military down to something in the neighborhood of say 150 billion dollars or even much much less; altering the energy base of the US away from oil, coal, gas, nuclear and achieving energy self sufficient architectures; high speed railways (reducing the number of trucks), more efficient automobiles—preferably using alternative means of fuel (this equally true of airplanes and ships); reorganizing the politics of the watershed to protect it from pollution and to secure the nation in terms of clean air and clean water; national health care—etc. etc. etc.

When I look at a number of the comments here I have to wonder what people think the purpose of government is supposed to be about?

When I read someone saying that they don’t want the government to have more control over our lives but seem to leave out that this is precisely what the “War on Terrorism” is all about. The War on Terrorism is long run deficit spending which will in turn create a greater hate of the US and as we weaken on the world stage, the animosity towards us will expand. Is this “good government”? The price of this war is a long run deficit, while the argument in regards to national healthcare is false. National Healthcare can be devised in a manner in which it will pay for itself but it will mean higher taxes.

The War on Terrorism has cost the nation far more than a trillion dollars and has turned the country into a total police state. The price at home has been the very symbol of the US since 1776, namely the concept of constitutional democracy and the meaning of civil rights. Universal Healthcare is about a right to be cared for in event that you become ill, or say as you become old and lose your ability to care for yourself that you will be cared for—it’s about the reality of life as opposed to the BS sold in the Hollywood fairytale.