I learned early on to get "A's" in my graduate level econ classes that I had to parrot back on the essay tests the professor's personal biases. Most of my econ professors were typically liberal. In my career and real life, I learned the economic theories being taught in those classes were nearly irrelevant in solving the thorny problems of both business and personal finance.
Let's face it, what we're all trying to achieve is an increase in the standard of living for the 99 percent through the creation of national wealth. Wealth is created by converting raw materials through various means of production into highly demanded goods and services. We've got no shortage of demand. Everybody wants good food, big houses, nice cars, HD TV's, excellent health care and a myriad of other things that enrich our lives.
Business and real life taught me that debt was a dangerous tool only to be used wisely under very specific sets of circumstances. Many a home, business and nation have been toppled by uncontrolled debt.
The rules of taking on debt in one's personal life are:
1. Use debt only for major necessities which have a long economic life (home and automobile). Because these assets retain economic value over several years they have a lower interest rate as the asset secures the debt.
2. Don't use debt to pay for everyday living expenses or to increase your standard of living (credit card debt is dangerous). Because food, utilities, Wii's, and HD TV's rapidly lose economic value you pay higher interest rates (credit card rates).
3. Limit overall monthly debt payments to a modest percent of your monthly income (otherwise your paycheck will go to pay interest).
The rules of taking on business debt are very similar.
1. Use debt to finance long lived assets.
2. Don't use debt to finance daily operating expenses.
3. Keep your percent of debt payments to total income as low as possible. The most successful and least risky businesses over the long-term maintain low debt to equity ratios.
Lie 1. My liberal econ professors taught me that government needs to go into debt to increase government spending to stimulate the economy to avoid economic downturns.
This we have painfully learned is not true. However, most democratic politicians and their economic advisors subscribe to this lie. Government is no different than a household or a business when it comes to debt. Debt is a dangerous tool always to be used sparingly and for the right purposes. The federal government routinely uses debt to pay for daily operating expenses. We continue send our taxes to Washington to make debt payments for many years after the expense has been incurred. There is nothing tangible left to secure the debt.
Lie 2. We can get out of debt and fund round two of Obama's stimulus plan by increasing taxes on millionaires.
Gross Domestic Product (GDP) which is the measure of the total economic output for a given year was $14 trillion dollars in 2010. Government or non-taxable GDP was $3.3 trillion. That leaves $10.7 trillion of taxable GDP. The national debt currently stands at $15 trillion dollars. The Congressional Budget Office estimates the millionaire's tax will generate $45 billion annually. That means it would take over 300 years for the millionaires tax to pay off the national debt.
The solution to our debt problem is twofold. First, we must reduce government spending. Second we must increase federal revenues through increasing private taxable GDP and not through tax increases. The questions then become where do we reduce spending and how do we increase taxable GDP?
Insert the videotape for the year 1981 into your VCR. You will see that Arthur Laffer, an economic advisor to President Reagan, was credited with the universally agreed upon Laffer curve. The Laffer curve showed that at both a 0 percent federal tax rate and a 100 percent federal tax rate that government revenues equal zero. More importantly however, it implies how the tax rate affects wealth producing or taxable GDP.
Federal government spending uses the nation's wealth created in the private sector via taxation. Any reduction in government spending makes those dollars available to create new taxable wealth in the private sector. A 100 percent tax rate not only reduces government revenues to zero but it also reduces wealth producing taxable GDP to zero. Therefore, to mathematically maximize national wealth, government spending would need to be reduced to zero.
It would be inadvisable to completely eliminate government spending as government provides certain essential services to the country. Since these essential services do not create wealth but use wealth, it makes sense to limit government spending to essential government services in order to maximize taxable wealth. Obama's first stimulus plan funded not essential government services but the politician's wish list. National wealth was wasted for non-essential items. This is precisely why Obama's first stimulus plan failed. A millionaire's tax to fund a second stimulus program is a recipe for failure.
Since limiting government spending maximizes taxable or wealth creating GDP, then the only sensible way to eliminate the $15 trillion of federal debt in our lifetimes and our grandchildren's lifetimes is to reduce government spending.
Raising taxes on millionaires is a ruse that will divert taxable wealth producing capital to wasteful non-essential, government spending and leave our posterity in debt for decades to come.
Dickson is a retired executive in the energy and natural resources sector who lives in Pleasant View.