Friday, May 07, 2010

The Basic Conflict Between Balanced Budgets vs Incurring National Debt or Printing Money

Putting an economy largely in the hands of a central government or unregulated private enterprise have been shown to have different, but comparably troublesome, problems. Central government control destroys initiative and retards the accumulation of private capital that is necessary for growth.  Unregulated private enterprise concentrates wealth in the hands of a few and destroys opportunity for the broad mass of citizens. Both government and private enterprise are authoritarian in nature and take measures to advantage themselves, if checks and balances or regulations are not in place to control them.

Historically, management of economies has become complicated, particularly by the introduction of fiat currencies, making national economies issuing fiat currencies very different from local and personal economies which don’t have that power. The latter must operate under budgets which balance incomes with expenditures, while the former can simply borrow or print money with only devaluation of its currency as the controlling factor. Unless this difference is recognized, there is always a battle between forces that want to treat national economics like local or personal economics and the forces that want to use the national power to borrow or print money to counter instability. Over the years, the forces that want to balance income and expenditures have prevailed except in times of great crisis.

This is the crux of the problem we face. We have two choices, either demand austerity measures or tax increases in times of recession, in a attempt to rebalance budgets, or use the federal government’s power to borrow or print money to prop up the slumping economy.  The first hurdle we must get over is that these are real alternatives. One or the other is not the only course. And, depending on the circumstances, one or the other may be the more advantageous. We must not let preconceptions or past policies prejudice one alternative or the other.

If it can be shown that national budgets have become wasteful or bloated, programs have become obsolete, or lobbying pressures have caused expenditures to become excessive, austerity programs can be very useful. If taxes have become excessive or unbalanced among different segments of society, changes may be required. But if the country faces a crisis of instability due to natural sources or accumulated risks, austerity measures or tax policy changes may not be the best answer. When faced with reduced demand, government stimulation of demand to replace lost private demand may be a better alternative.

If the national government borrows to increase demand as a result of a reduction in private demand, it is subject to its ability to borrow and at what rate. If rates become sufficiently high it may become advantageous to simply print money and pay the price in a devalued currency. These are real alternatives that must be weighed. If a country is disadvantaged in its trade relations with the rest of the world because of the value of its currency it may be more advantageous to print money. If the rest of the world is awash with capital and borrowing can be done at a low rate it may be advantageous to borrow.

Until we can agree as a nation that we have these alternatives we will be unable to reach the best solution when confronted with recession or other forms of instability.

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