Debt leads to the creation of inflation and dependency.

Looks like Galbraith needs to brush up on his economics there. For a guy who’s father I’ve seen in an economics 101 textbook, he really doesn’t know anything about the real world.

“There are two ways to get the increase in total spending that we call ‘economic growth.’ One way is for government to spend. The other is for banks to lend.”

Real wealth, and economic growth in general, is based off of increases in productivity and new innovation. More money doesn’t translate to growth, just bubbles and inflation. Money is a -measure- of value, a means of exchange, etc.; more money is not necessarily more wealth or economic growth. A production possibilities curve doesn’t move without technological innovation; and if you can’t produce more as a society for the same resources, you’re not better off, no matter how large the numbers on the computer screen (or how many the pieces of paper in pockets) are. But this is the difference with Keynesian and Austrian economics so I’ll stop there.

It’s pretty easy to see that if everyone suddenly had twice the income tomorrow with no increase in productivity, everything would just double in price. Those who spent before everyone caught on would get a little extra benefit, but of course at the expense of those who failed to do so.

“For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash.”

Private loans made by businesses generally go into creating new jobs, or at least eliminating inefficient ones using capital investments.

“Ordinary people benefit, but there is nothing in it for banks.”

Reality says otherwise. Deficit spending must be made up by either printing money, borrowing it, or taxing it. Printing money causes inflation and hurts anybody who doesn’t get the government check; the rich people probably don’t give a crap but the middle class are hit the hardest. Taxing it is a more direct method: if it’s from consumers they get hurt, if it’s from businesses they downsize and find another industry, and if it is on capital returns it inhibits investments.

No, the more common method is to borrow the money, but what does the Treasury do? It sells bonds (with interest and a requirement to pay the principle) to banks. To banks. Banks get their interest either way, it doesn’t matter. But that isn’t even an issue anyways, as it makes no real difference (they can sell the bonds to anyone else, it doesn’t affect society any differently on who gets the interest).

The real problem is the fact that the reserves are hit and banks must cut down on loans for private businesses by raising rates (or alternately the government offers a higher rate than normal on the bonds). Thus, a whole bunch of business (and their associated jobs) that could have existed, won’t be created.

Chances are, the businesses with new ventures that would have been affordable had they been able to borrow at a lower rate would have made enough profits to pay it back plus interest; the government, on the other hand, budgets expenditures not on the fact that the expected return in increased taxes will be able to pay back the interest in the future (and even if it did, the government has no punishment if it failed every single time at doing so) but on how much to raise taxes to cover for it, or how much to apportion based on need, or whatever.

In short, not only does borrowing hurt the private sector by taking away from potential profit-making ventures, but it’s also unsustainable because the government rarely makes sure it can pay the interest back.

“Your family needs income in order to pay its debts. Your government does not.”

Right, the government doesn’t actually have income because it obtains money through the public equivalent of blackmail (taxation) or counterfeiting (printing). But we’ve already discussed how both of those hurt everyone. And, if relevant, I find the idea of borrowing to pay for past borrowing hilariously idiotic and unsustainable.

“With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Because it is the source of money, government can’t run out.”

Not really (and banks can do this too via the fractional reserve system). What can happen is that the government prints or taxes so much that it destroys its countries economy (see the many real-world examples, both ancient and modern-day) and collapses in on itself into anarchy.

“But for true sovereigns, bankruptcy is an irrelevant concept.”

Nobody cares about bankruptcy and anybody who does is missing the issue here. And when he says ‘too much spending may lead to inflation’, I’m sure he means ‘any spending that is not borrowed or taxed’.

“Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid.”

Nobody would agree to loan money knowing that A) It won’t be paid back, and/or B) They won’t get interest. A bond has a fixed life that must be paid back: if the government simply reborrows the money then fine, but they still need to pay interest. Understanding that to be true, we would have to assume that Galbraith here is either an idiot or intentionally misleading us as to the importance of ‘paying back’ debts.

“So the public debt simply increases from one year to the next.”

And interest payments go up and up and up…

“Far from being a burden, these debts are the foundation of economic growth.”

That’s debatable, but whatever.

“Social Security and Medicare are government programs; they cannot go bankrupt, and they cannot fail to meet their obligations unless Congress decides – say on the recommendation of the Simpson-Bowles Commission – to cut the benefits they provide.”

Why do we have taxes if the government can pull cash out of its rear with no repercussions? How is he able to try to pass this off as truth so many times in one article?

“Social Security and Medicare are transfer programs.”

Working ideally, sure. Government programs, however, have absolutely no reason to be efficient and cost effective (in fact, being over-budget and wasteful usually results in increased spending) and tend to give people money for twiddling their thumbs (remember how I say that growth is based on actually doing something useful for society: refer to the broken window fallacy). At least private companies tend to make sure that they get their customers the greatest benefit for the least cost.

“Rather, Social Security pools resources, so that the work of the young collectively supports the senior population.”

The morality of this is debatable. To what extent is Robin Hood blackmail acceptable (taxes are blackmail, after all)? And it’s not like private charity given donations on a voluntary basis could not perform this role, so is government intervention necessary, especially when it is almost always wasteful (at least charities have to compete for donors so that they know the money is being used well).

And what happens when seniors outnumber the youth? Do we hurt the productive class even more by raising taxes? And what happens when seniors are relatively small? Do we waste the money on useless expenditures (note: evidently we do, since that’s what happened…). Better to have the money placed in an investment firm that will invest it and earn a decent return: that way you can be sure that you get back what you put in, keep up with inflation, and benefit the economy.

“Social Security and Medicare also replace private insurance with cheap and efficient public administration.”

That’s a riot! Perhaps you should research more into the system it uses if you think that Medicare is ‘cheap’ and ‘efficient’. Hint: it’s one system, with one company, that decides how much your Medicaid costs and what treatments are used. If there’s one thing economists ought to realize, its that monopolies are generally inefficient.

“Public deficits and private lending are reciprocal.”

Usually because increased government borrowing means less for everyone else, yes. And, in the long run increased deficits lead to a crappier economy while increased lending leads to a better company.

“But right now, we don’t have functional big banks. We have a cartel run by an incompetent plutocracy, with its long fingers deep in the pockets of the state.”

Yes indeed. And thanks to ‘Too Big to Fail’ government interventionism they’re going to continue to suck until people wake up to the fact that you can’t have free markets and free banking with the government interfering in the loans market or bailing out banks.

“For functional credit to return, we’ll have to reduce the unpayable private debts now outstanding”

Certainly. For starters, get rid of the regulations that forced banks to make such unsustainable loans (see the Community Reinvestment Act after the dot com bubble). Next, get rid of Fannie Mae and Freddie Mac who compiled these bad loans and backed them with taxpayer money.

“To restore private incomes (meaning: create jobs) and collateral (meaning: home values)”

Correction: to ‘allow’ -sustainable- jobs to be created and ‘allow’ the restoration of the true value of homes. Telling people to dig a ditch and then fill it again might get people, but whats the return on the money borrowed? Nothing, so people are worse off in the long run. At least real jobs keep up with the interest rate.

“and we’ll have to restructure the big banks.”

Yes, let’s get government into the banks at the same time as we acknowledge that these people have too much influence over the government. That will work out well.

“and create incentives for profitable lending in energy conservation, infrastructure and other sectors.”

You can’t create an incentive out of nothing; it always has a cost (whether that be in investment capital, use of labor, or whatever). If the venture would not be profitable without the incentive then what you are really doing is wasting taxpayer money to get companies to do things that people don’t really want (hint: if something costs more to make than people are willing to pay for it then that’s evidently not a very good use of scarce resources in a world of unlimited wants).

In fifty years when we’re a little lower on oil (and thus it is comparatively more expensive) things might be a little different and sustainable energy might be a better idea to look at, but until then you are limiting our use of resources that would expand our economy much more.

“It’s possible, of course, that all the deficit hysteria is intended to divert attention from the dysfunctions of private banking, and so to help thwart calls for financial reform.”

Yes, our banking system needs work, but Galbraith’s proposals don’t necessarily do that.