Tuesday, May 17, 2011
I once had a conversation with an American who was furious at his govt for the national debt and he felt strongly that his govt should be forced to default on that debt and be taught a lesson on prudence. That was 1994! 17 years later the debt is even bigger and a default would be instant disaster because it will plunge the global economy into a crisis that will perhaps take decades to get out of.
Many people have the misconception that Western govts get into this type of trouble overspending on welfare. This is not true. The US national debt fell steadily until Ronald Regean became president. He cut welfare spending, increased military spending and cut taxes. His deputy George Bush senior and his son continued the tradition piling up more national debt and fighting wars in the middle east. In the 80s, when the national debt was low, the US had what many saw as an overly generous welfare system. One of Regean's achievement was to slaughter the "welfare queen"[Link] the sterotype of a lazy woman who did not work and lived on govt handouts. Research later showed the "welfare queen" was a myth[Link]. Regean proceeded to put US into a path of large budget deficits by spending on the military after cutting taxes. A one point, Regean decided cut govt funding for mental institutes [Link] saying it was not the state responsibility to take care of these people sending thousands of mentally unsound individuals onto the streets. Whatever he saved by cutting welfare program, he spent on the military - he would later claim victory for the Cold War saying the Soviet Union bankrupted itself trying to keep up with the US in military spending. This again proved to be another myth [Link] and Gorbachev explained that the inefficiency in the Soviet economic system was what did them in not the Cold War.
Recently, the US debt ballooned due to the need to rescue the financial system with bailouts and the US economy had to be revived with massive govt spending. During the financial crisis, people like Jim Rogers suggested allowing the system to fail. reset the financial system and rebuild it to fix all the problems. That was not do-able politically as there would be too much pain for the populace to take in a major disruption of the system.
Today for every dollar the US govt spends, 40 cents is used to service its debts.[Link].
What got the US govt into this situation is not welfare spending but tax cuts, military spending and bankers who created the financial crisis.
Beware of govts that exercise extreme parsimony in social spending but love tax cuts, military spending and deregulating the activities of banks. You have to ask whether a govt that debate vigorously for a $1 per day increase in assistance should also have its defense budget scrutinised because a weak social infrastructure will make us just as vulnerable because we are counting on ordinary men to be willing to die for their country in battle.
Posting Time 6:50 AM
Posted by Lucky Tan