Generational Theft?
The Republican response to President Obama's stimulus package and budget proposals have been nothing but predictable. They warn us that we are about to "saddle our children and grandchildren with debt," debt so profound that it amounts to "generational theft."
The president and a number of commentators were certainly correct to note that this attack dripped with irony, as it followed eight years of massive Republican budget deficits. But in leaving it at that, the Democrats seem to be conceding the fact that government debt is always bad. That's simply not true, but it seems to follow a dance every Washington politician seems forced to follow. We need to stop the music on that dance, right now.
First, right now, debt is required. There seems to be a breathtaking consensus among economists that government debt is necessary now, because only government can create the kind of demand that will open the spigots clogged with cash hoarded by nervous banks and investors. A bank is afraid to make a loan to a steel company that would like to modernize and fire up a steel mill, if there are no orders for steel. If the steel company comes to the bank with a government contract for girders for overpasses on the interstate, the bank will loan the money, the mill will light up, workers will get paychecks, and they will spend at the local stores and groceries. Those stores and groceries will hire workers, buy goods from suppliers, who in turn will hire workers and buy goods. All this will flow from building things we actually need.
But there is another reason that this kind of debt is not "generational theft": Unlike the run-up of government debt over the last eight years, the Obama plan is to spend money on things that will actually benefit the next generation. If we borrow money like the Bush Administration did, and in the end you have nothing to pass on to the next generation except for new bridges and schools in Baghdad badly built by a Halliburton subsidiary, that's generational theft. If, on the other hand, we build schools, bridges, power grids and infrastructure here in the United States, we are creating wealth and the means of more production that our children and grandchildren will actually use. If we borrow money to repair parts of the federal interstate system so that bridges don't fall down when our children and grandchildren drive over them, that's not generational theft. If we borrow money to shore up the levees and wetlands that would protect the next generations of New Orleans-ers, that's not generational theft. Indeed, in that case, it would be carrying out a solemn promise made by George W. Bush as he stood by a floodlit Jackson Square.
As I wrote in this column last October 13, "it is not unfair to 'saddle our grandchildren with debt' if it is to help pay for assets that enhance the quality of life long after we are gone. It is only unfair to ask them to pay for us to party now." That is why that wild-eyed liberal Dwight Eisenhower actually proposed separate budgets for operating and capital. Operating budgets would be pay-as-you-go. Capital budgets that provide for the creation of assets that will be enjoyed for generations to come should be paid for over time. That is good, responsible, conservative, grownup budgeting.
It's instructive to note the bipartisan buzz-saw President Eisenhower ran into when he had the temerity to suggest that his bold plan for an interstate highway system (which he knew was necessary after comparing our nation's roads to the German autobahn) should be considered a "capital investment" paid for by a separate bond issue. Eisenhower, of course, was attacked from the right and the left, because it was easy for politicians to impersonate grownups and insist that government "live within its means".
While the Obama Administration is not calling for the issuance of separate bond issues to finance investments in infrastructure, energy, health care reform and education, that certainly could be justified. The beauty of Obama's budget plan is that it is targeted to spend money on projects that will produce not only jobs in the short term, but efficiencies in the long-term. On infrastructure, the goal is to have a transportation grid that gets the next generation of workers and goods to their destinations more efficiently. On energy, the goal is not only to employ renewable sources of energy that won't choke us to death, but to address the fact that a huge percentage of the energy we already create is wasted in our grid. On health care, a trip to the doctor's office dramatically displays the waste in our system: you'll see dozens of workers dressed in scrubs who don't actually administer health care; rather, they spend their day negotiating with insurance companies. Our wildly inefficient and expensive health care system is choking American industry: that is why the chambers of commerce and the unions both favor reform for the next generation of families. Finally, on education, the plan is to spend money on the infrastructure that won't just create construction jobs now, but will create 21st century classrooms and teaching environments that will hopefully return our competitive edge.
Just like Eisenhower's interstate highway system, the capital projects coming out of the stimulus plan and the Obama budgets are designed to create long-term wealth, and assets that will enure to the benefit of the next generation and the generation after that. The Administration seems to understand that it will be held accountable to carry out that promise. To the degree that effort is successful, that's not "generational theft." That is long-term investment.
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What about the two wars that the Rushpublicans put on the credit card. When is the Rushpublican party going to take responsibility for that??
Rushpublicans the party of NO
NO responsiblity
NO accountibility
Let's be clear - any time the value of single family homes in this country goes up faster than the rate of inflation, there is intergenerational theft taking place - new families are transferring their wealth to old families. When a person buys a house in 1975 and sells it in 2005 for 5 times the original price, where does all that extra money come from? From the buyer. Who is the buyer? The buyers in 2005 are the children of those who bought in 1975, of course. Enough is enough. Stop the intergenerational theft.
That's not entirely true. You're leaving out interest expense. Monthly mortgage payments are made up of both interest expense and principal, and interest rates have come down dramatically since the 1970s. In the 1981-1982 period, for example, the average 30 yr fixed was around 17%. Now it's about 5%. So a mortgage payment of $2851 a month with a 17% interest rate gives you a $200,000 house, while a mortgage payment of $2851 a month with a 5% interest rate gives you a house of $531,200, an increase of 265% in the value of the house with the same mortgage payment.
No, that IS entirely true. The fact that interest rates go up or down doesn't change a thing. Lower interest rates shift the demand curve, driving up prices, just as the interest expense tax deductions shift in the demand curve. Think about it. A seller of a house in 1981 is going to seek an asking price based on perception of where the buy-point is on the demand curve - $200,000 in your example. Following your example, a seller in 2005 would list the house for $531,000 based on where the perceived buy-point is on the demand curve. In your example, who benefits from the lower interest rates? Not the buyer - the buyer is paying $531k to get the same house that sold for $200k in 1982 - the same house. The banks are not making any more or less than they were in the 1982 market. So who profits? The seller does of course. Intergenerational wealth transfer at work again.
Second,
The environmental damage now being wreaked needs to be included in a discussion "generational theft", as well as the overuse of finite resources. Likewise the money we waste on unnecessary wars and unneeded weapons systems. There's the real theft from future generations: depriving them of the natural resources that will be necessary for a decent standard of living.
The author is right you know.
People get up in arms about current account deficits and capital account surplus in the US for years. but Current Account deficits in itself is not a bad thing nor is capital account surplus. but the trick is what is the current account deficit funding.
if we are borrowing from other countries year after year more than lending (capital account surplus) it in itself is not a bad thing. If we are using that capital to improve infrastructure, grow our economy, create useful jobs etc. If we are using it just to spend on useless things, then of course in the future, the spending would have to be cut in greater amount to pay for all that.
The author apparently is not aware that spending on "schools, bridges, power grids and infrastructure here in the United States" has been at very high levels for the past three to five years. In fact, such spending was the highest as a percentage of GDP since the 1970s.
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/privsa38.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/pubsa09.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/privsa61.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/pubsa14.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/privsa67.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/pubsa13.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/privsa33.aspx
http://www.fxstreet.com/fundamental/economic-time-series/data/cenc30/pubsa08.aspx
And since nothing substantial had been done on many roads, schools, etc. since the 1970s, what you are looking at is merely a game of catch-up.
Ok so we build some bridges and other infrustructure, these are just temporary jobs
If the job is done then the worker is no longer working.
How is that building long term wealth?
It keeps construction workers working and factories that produce materials for construction operating during this severe cyclical downturn in the residential construction industry and soon to be severe cyclical downturn in the commercial construction industry.
That bridge will generate income for fifty, eighty or a hundred years. It will also require upkeep, which are steady jobs.
Insulating a government building creates jobs now and it saves large amounts of energy in the future.
Better health care will save numerous lives and prevent medical complications.
More research will create scientific and economic return and lead to more jobs in growth industries.
On the other hand, we could just hand that money to you so you can buy another latte. Sounds cool, too.
I don't know that I agree with the idea that only government can save us. Frankly I think that's absurd. American's need to take action on their own. If the founding fathers had the idea that only government could save them then they would never have gone to war with their government.
On another note. I'm looking at all this spending of "future money to be gotten by taxing everyone" and at the printing presses of $$$ in overdrive and what I envision is a future of hyper-inflation. For the last six months I've been watching daily the gold and silver markets with the widget http://www.learcapital.com/exactprice and listening to investors like Peter Schiff and Peter Grandich and they see gold long term taking off because of all this big government that is continued from the Bush administration into and magnified by the Obama administration.
Of course it has me wondering if, like FDR, President Obama doesn't have a plan to make it illegal for citizens to own gold.
We have a pretty good track record of the actions Americans will take when left to their own devices.
They take on credit card debt.
They inflate the housing market.
They buy plastic bouncing castles from China.
I don't think the modern American is the kind of person the founding fathers had in mind when they talked about freedom to take ones fate in ones own hands. The surely thought about adults, while what we are dealing with here is a nation of three year olds with access to plastic money.
Fair?
Certainly the spending practices of the modern American are to blame in part. But it didn't happen over night or because the government wasn't involved in moving America towards a financial system run on credit and encouraging such a plan. They should have focused more on savings not telling banks that if they want more money they must give housing loans to people who have no way of paying them back.
The vast majority of us don't want government to save us. We want government to PROTECT us! Protect us from the Bernie Madoffs and Allen Stanfords. Protect us from the Enrons and Arthur Andersons. Fix our bridges so highways don't collapse like Minnesota I-35. Fix the levies so we won't have another Katrina.
No, the government shouldn't put food on your plate or clothes on your back, or even a roof over your head. But government should make sure you have the same opportunity to do those things as your fellow citizen.
There are those who rightfully fear socialism and communism. But we also have to avoid becoming a plutocracy or oligarchy. We have drifted much more closely to the latter two.
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