GOVERNMENT BUDGET CRISES

Abstract

In a recent New York Times opinion piece (August 21, 2015), Nobel Laureate economist Paul Krugman repeated his astonishing claim that Debt is Good, referring to national debt, offering for our consideration that, since interest rates are so low, the U.S. government could borrow more money and take care of our collapsing infrastructure, giving the economy' a boost to boot! (Never mind that the national debt is now over 18 trillion dollars and growing like an aggressive tumor).Despite Krugman's claim that the debt is owed to ourselves and thus not to be taken seriously, budget crises - at the international, national/ federal, state, count)' and municipal levels of government - are routine and disconcerting. The recent history of Greece is a good - and very troublesome - case in point, not to mention Puerto Rico, closer to home. Notwithstanding occasional and sporadic surpluses of one or two years, in most regions these respites are followed by many years of debt financing. If governments were held to the standards of private firms, a great many of them would have to declare bankruptcy. However, since governments can tax their citizens to raise funds - or, in the case of the federal governments of most countries, print money - governments can delay those consequences for a future generation of citizens and a different administration to confront the inevitable.Why do governments get into such straps so often? Only rarely is it due to corruption: rather, the problem is systemic.Essentially, governments lack the requisite basis (information source) for assessing the relationship between their resources and their expenses. In other words, since the means by which that relationship is most effectively understood is unavailable to governments, they are unavoidably ill informed, seriously undermining financial planning. Let us see how this is so.The Calculation ProblemLudwig von Mises, the leading economist of the Austrian School, established as far back as 19221 that meaningful and useful economic and financial calculation requires a free market place where people - for whom governments work - can allocate their resources by selling and/or buying as they deem fit. These millions of purchasing instances communicate to producers in the market place what is in demand, what customers are likely to buy, as well as what they will leave sitting on shelves or dispose of otherwise. This information is vital for producers in estimating what they need to do. Inventories and production quotas, among other things, will be adjusted, very closely, to what people who shop are likely to purchase.The system that best communicates this information between millions of buyers and sellers is free market capitalism. Further, people in such a system have a reasonably clear idea of what belongs to them, through the institution of private property rights. So, they know what they can spend and what would break their budgets. Even buying on credit is adjusted to their capacity to carry debts. In short, a free market provides a very clear warning signal about overspending.An economic system with this advantage is less likely to experience major vacillations, including financial crises, because, on average, people will balance their economic purchases with their available resources. Put that in terms of several hundred million transactions in the market place, and a very complex yet largely smoothly functioning system results.2Von Mises, and his most famous student Nobel Laureate F. A. Hayek, presented these ideas in the great debate about whether socialist economies can function.3 As one of the most famous American (Marxist) socialist economists put it recently, ...Ludwig von Mises...had written of the 'impossibility' of socialism, arguing that no Central Planning Board could ever gather the enormous amount of information needed to create a workable economic system.... It turns out, of course, that Mises was right. …