Boehner's Flaw

In discussing his latest debt ceiling plans, House Speaker John Boehner said yesterday, "Remember one of the principles here: we are not going to increase the debt limit by anything more than what we're willing to cut spending." Specifically he's proposing to raise the debt ceiling by $1 trillion ($1T) and to reduce future spending by around $1T. The concept sounds reassuring at first, but in practice it wouldn't come close to solving the problem we face.

The debt ceiling exists to limit the amount of debt we can carry. Our debt grows when our federal government spends more than it receives in taxes and has to borrow money to cover the difference. For each of the past 3 years the government has spent about $1.5T that it didn't have, and our debt grew by that much each year.

Boehner's proposal is to raise the debt ceiling by $1T and to cut spending by $1T over the next 10 years. That would mean cutting spending by only $0.1T each year, which would reduce next year's deficit from $1.5T to $1.4T. Well if we only raised the ceiling by $1T, those cuts wouldn't even get us through 1 year without us hitting the ceiling again, at which point Congress could just apply Boehner's principle again...and then again, and again, essentially just paving the way for more astronomical deficits.

The real flaw here is in comparing the amount of spending cuts to the amount we raise the debt ceiling. The right thing to do is to compare the amount of spending cuts to our projected deficits. If we're about to annually spend $1.5T we don't have, we need to cut $1.5T in spending per year! Accomplish that, and there would be no need to raise the debt ceiling.

Creating Wealth

There is a widespread notion that there’s only a fixed amount of wealth in the world — that one can only gain wealth at the expense of others. This belief goes hand in hand with a variety of common viewpoints: the conviction that one man’s fortune is unfair to the rest of us; the guilt many Americans feel on account of our relative wealth in the world; and the fear that immigrants who send money back home have reduced our overall wealth. But what exactly is wealth? And if the fixed-wealth view is wrong, how is wealth created?

Wealth is anything that helps a person or group meet their needs and desires. People use wealth to meet needs on their own (e.g., a house is a form of wealth that provides shelter) and by interacting with others who are in a position to help (e.g., money is wealth that can be used to buy food from a vendor). To better understand the nature of wealth, let’s consider whether a simple transaction between two people adds wealth to their community, and whether wealth has been taken from others in the process.

Let’s say that Grace needs a jacket and pays James $50 to make one for her. For simplicity we’ll assume that James already has the materials and machinery necessary for the job.

After the exchange, the community has gained one jacket at the expense of the materials required to make it. Since the jacket is able to meet needs such as warmth and comfort that the raw materials alone could not, wealth has been added to the community.

In addition, James has likely learned something by making the jacket. Perhaps he’s discovered a way to speed up the process or to improve the quality of his product. James is now better able to meet the needs of others; his newfound knowledge is a form of wealth added to the community.

The 50 dollars themselves still exist, but are they worth as much as they were before? Do transactions like this reduce the value of currency or raise it? Well an increase in the supply of a product tends to reduce its price because the additional competition among suppliers forces them to slash prices to compete for customers. And lower prices mean more bang for the buck. So this transaction is representative of the type of production that increases the value of currency, which adds wealth to communities throughout the world.

On the other hand, the machinery used to make the jacket has undergone wear and tear that will eventually take it out of service, leaving it unable to meet needs any longer. Over time, different forms of wealth are inevitably lost: products age and lose their value, and people leave the work force taking their expertise with them. But if beneficial transactions happen efficiently and often enough, overall wealth creation will outpace these natural losses.

In the end, Grace and James have added wealth to their community without taking it from anyone! Wealth has been created.

Sadly, the fixed-wealth misconception is self-fulfilling: antipathy toward achievers leads to tax-raising schemes that stifle people’s ability and incentive to create wealth. In this time of need, we should allow and encourage talented and motivated people to do what they do best.