The Bankrupt Economics of David Brat

Pragmatic Capitalism ^ | 06/17/2014 | BY CULLEN ROCHE

[SeekAndFind]

The big political news from last week was David Brat’s upset win over Eric Cantor for Congress. Brat is an economics professor at Randolph Macon and from his research it’s clear that he has strong political views embedded in his economics. It’s perfectly fine to be a political economist, but when it leads to an obviously flawed understanding and presentation of reality then it becomes a real problem in my opinion. For instance, in his website Brat says the following:

“Our national debt has skyrocketed, reaching over $17 trillion dollars. What our leaders in Washington fail to mention is the $127 Trillion dollars in unfunded liabilities (see U.S. Debt Clock). This lack of leadership on both sides of the aisle threatens our nation’s stability and long term growth and forces an undue burden on our children and grandchildren. We must balance the federal budget by reducing spending. I will support a balanced budget amendment which will force Congress to reign in the out of control federal spending and to restore confidence in the American economy.”

What does any of that actually mean though? It makes for fine talking points, but it’s intentionally vague rhetoric with no real meat behind it. After all, what does it mean that there are $127 trillion dollars in unfunded liabilities when you don’t even mention the asset side of the balance sheet? What does it mean that our nation’s stability is threatened? Is he saying we’re like Greece? Or that hyperinflation is coming? And what is this burden on our children and grandchildren? Are our children born with a debt bill on their toes? Let’s explore these points a bit.

I’d begin by pointing out that Brat is being very misleading when he mentions the $127 trillion in unfunded liabilities. the IER estimates that total fossil fuel resources owned by the Federal government are valued at over $150 trillion alone and as I discussed previously, the assets of the USA likely exceed $200 trillion so this discussion is flawed if we don’t also discuss the asset side of the balance sheet. And when you look at both sides of the balance sheet it becomes clear that Brat’s views are intentionally narrow.

Regarding the government’s debt position Brat appears to hold contradicting views. In an interview with Sean Hannity last week Brat referred to the USA as the “wealthiest country in the world”, but cites the government’s debt as a huge burden on the country. His website goes on to say:

“David Brat understands that an economy cannot thrive with such a crushing national debt, and will oppose the efforts of status quo politicians like Eric Cantor to continue to spend money we do not have.”

These positions are obviously contradictory. If the USA is the wealthiest country in the world then the US government is the entity that exists to enact public policy by transferring some of this wealth at times. If the private sector is wealthy then, by definition, the government must be as well since its ability to spend and issue bonds is ultimately a direct function of the prosperity of the underlying private sector. In the case of the USA, we produce 22% of all global output and issue the risk free asset in the global economy so it makes no sense to argue that the USA is spending “money we do not have” while also claiming that the USA is the “wealthiest country in the world”.

Now, I should be clear that the USA is a unique case in many ways. The USA has a certain “exorbitant privilege” due to the size of its economy and its status in the global economy. But when we discuss these matters we should be clear and not resort to vague political rhetoric that misleads people about our reality. The fact is, the US government isn’t running out of money. The US government isn’t $127 trillion in the red. The government isn’t bankrupt. And so scaring people about the solvency of the government is an extremely disingenuous way to pass one’s political agenda.

Don’t get me wrong – there are very legitimate arguments for reducing the size of our government, cutting spending and encouraging private sector investment, but these factually incorrect and fear based approaches not only mislead people, but result in fundamental misunderstandings about the way our monetary system works which leads to poor policy decisions. That doesn’t help anyone understand potential problems with government spending or what the risks could be. We should expect more from our politicians. Especially those with an econ background.

Related:

• Why the US government isn’t going bankrupt
• The US government is not “$16 trillion dollars in the hole”
• Understanding the modern monetary system
• The biggest myths in economics

[Attention Surplus Disorder]

“If the USA is the wealthiest country in the world then the US government is the entity that exists to enact public policy by transferring some of this wealth at times.”

With all due respect, please accept my invitation to eat s**t. Who will define those times when it’s right to transfer wealth? Will it be us or will it be the Somalias of the world? Will it be intellectuals like you who think they are smarter than everyone else?

“The USA has a certain “exorbitant privilege” due to the size of its economy and its status in the global economy”

No, it has this privilege because of the Bretton Woods agreement which standardized world commerce (in short) on the US dollar. Should this standard, or agreement deteriorate, we would find ourselves in an instant detonation of our markets and our ability to conduct international trade because the market would impose an interest rate upon our debt our economy could not sustain. What would happen then, is our assets you speak of would become pledged in vastly greater numbers of dollars in terms of the debt service thereby due.

[Chewbarkah]

You posted this without comment. Are you in agreement with the author? Just curious.

[fhayek]

Bingo. The argument always seems to center around how much wealth there is in this country. So I guess we can keep running $trillion deficits forever. And it is not that the debt is being used as an investment in the future. The debt, largely, is consumed by non-productive people in the form of social programs. Might as well take out a huge loan and make a bonfire of the cash.

[SeekAndFind]

RE: You posted this without comment. Are you in agreement with the author? Just curious.

The answer is no. But why are you interested in what I think? I posted this for DISCUSSION. If you think the author is wrong, by all means, tells us why.

[RetiredTexasVet]

I suspect that Cullen Roche is a pen name that Krugman uses because everyone recognizes that he is a fool.

[winner3000]

(the assets of the USA likely exceed $200 trillion)

So, the unfunded liabilities are getting close to the worth of the assets of the USA, which are privately owned. I feel much better about that unfunded liability now! WTF! Is this guy on drugs?

The unfunded liability is real as the $17 trillion of national debt does not include the obligations we have for social security, and especially medicare. If a private sector company had this huge a percentage of liabilities that they kept off their books, the CEO and CFO would be put in jail for cooking the books, a Sarbanes-Oxley violation. But it’s ok for the government!

[Old North State]

Historic Note: John Maynard Keynes(where have we heard that name before?) represented UK at Bretton Woods. He proposed the establishment of a world bank using a new trading currency he called the ‘Bancor.” His idea was turned down in favor of a less ambitious world bank proposal sponsored by a guy named Harry Dexter White who was both the US representative and, secretly, a Soviet Agent. Is it any wonder that we're in the mess we are in?

[Rusty0604]

Are those the resources on Federal land that they won’t allow drilling on?

[Attention Surplus Disorder]

I’m not going to pretend for an instant that I am any kind of expert on Keynesian economics; but one thing about his proposals and theories that is always, always left out of any expositions of same is the idea that when an economy is booming, money should be set aside in a (for lack of a better term) “rainy day” fund to...I suppose...stimulate the economy for those times when it falls into a doldrums. As we both know, this never happens. Any time (talking about the US) the tax receipts of the Tsy appear to be heading to a surplus or even (heaven forbid) a reduction in outstanding debt, immediate and widespread claims for redistribution and wanton spending arise. This is from the same crowd that wish to spend your money and my money to buy the votes they think they need for their own re-elections. So when folks talk about “Keynesian” economics, they never want the listener to think about this idea that some part of the fat pile (when it is indeed fat) is to be set aside for lean times.

The distortion, of course, also applies to those of us who generally resist Keynesian policies once they are named or characterized as such. We may or may not know that Keynesian advocates themselves may or may not know the rainy day fund aspect, but we are perfectly certain that said fund will be raided before it materializes.

[usnavy_cop_retired]

This assumes that the $150 Billion is the Governments money, which it isn’t. The Government only gets a portion of that in taxes and fees. The balance belongs to the private companies that extract the oil/natural gas. Thus the whole argument is fictional.

[usnavy_cop_retired]

Billions should have been Trillions. Sorry about that.

[usnavy_cop_retired]

Billions should have been Trillions. Sorry about that.

[Extremely Extreme Extremist]

Typical leftist, pose strawman questions and then use them as the “answers”

[ConservativeMind]

“Cullen” shows he's ignorant and obviously does not understand economics, business, or politics.

1. He states that $150 trillion in fossil fuels available to more than counter our unfunded tax liabilities. This does not magically happen. It must be gathered at great expense and currently from private land (moratoriums on public land). Perhaps most importantly, 100% of sales of those fossil fuels do not go to the Treasury for the debt—a very small fraction will and Washington will spend it as they see it ramp up to come in. Cullen's proving he's clueless.

2. When the tax rates are high, incentive to risk or spend money is reduced, reducing government's tax income. The Laffer Curve helps illustrate this. When uncertainty around further increases looms, it further depresses economic activity. The onerous debt burden piling up does not ever get appreciably reduced, so how can it be said to not affect the future? Additionally, other countries are funding today's lavish spending here, and they can always pull out as the economic viability tipping point approaches.
Again, Cullen's obviously ignorant.

This guy has his head up his butt.

[Nifster]

Stupid article by a stupid author....typical lib who cares????

[Jim Noble]

If the USA is the wealthiest country in the world then the US government is the entity that exists to enact public policy by transferring some of this wealth at times

Incoherent.

[Revel]

“Who wrote this, Paul Krugman?”

Obviously a liberal of the highest order.

[Chewbarkah]

“But why are you interested in what I think?” I guess for some mix of entertainment and enlightenment. David Brat is somewhat unfamiliar to me, and the author of this article utterly so. Context would be helpful.

a) Does Brat actually advocate oddball economic ideas that make him “dangerous”? (if he does, the author failed to describe them);
b) Is the author part of the Republican establishment, or a Leftist? What are his motives for attacking Brat with a mallet? Politics? Attention? Personal animus? What are his qualifications to comment on economics?

I found the author to misconstrue basic concepts out of either duplicity, ignorance, or perhaps both. For someone playing on the word “bankruptcy”, he seems unaware that bankruptcy involves insufficient current liquidity to meet current obligations, not an utter absence of fixed assets. He falsely implies that theoretical US current assets (many of which are intractably illiquid) can in some way “fund” unfunded liabilities, without disastrous consequences for values like national sovereignty. He seems oblivious that fixed estimates of liabilities relate to a closed end time-frame, whereas entitlement liabilities and interest continue to accrue after that artificial time-frame ends (or at least until collapse stops the game); the expended assets can’t be spent or borrowed against again. Because having cake and eating it too doesn’t actually work, this is a death spiral. He resorts to special pleading about the US, as if it is somehow immune to economic laws, and thinks currency devaluation can buy free lunch forever without consequences (such as hyperinflation and/or other nations establishing alternative reserve currencies). On the positive side, he spelled “Brat” correctly.

[Swordmaker]

so it makes no sense to argue that the USA is spending “money we do not have” while also claiming that the USA is the “wealthiest country in the world

It's not the damn government's wealth to be spending.

You are SO right!

The problem that Cullen has is that he is making a false equivalence, hoping no one will notice. Brat knows what he is talking about. Brat said ". . . money we do not have. . . " to which Cullen responds we have at least $150 trillion in petroleum still in the ground.

The serious mistake that Cullen is making is that the potential asset of "petroleum in the ground" is in no way the equivalent of the medium of exchange called "money."

Money, as we use it, is loaned into existence, not pumped out of the ground. Petroleum is consumed; money is not. As an analogy, let's say I owe Jim Robinson $117,000. I have $150,000 in equity in my house. I'm already borrowed to the limit on my signature trying to pay Jim And my other creditors back and can't carry much more debt service on my income. . . but I'm borrowing more from Jim at about $1000 more each year, a lot of which I pay on interest to Jim. Cullin is saying that because I have that valuable asset, my house, I'm not in trouble. . . My house will save me when it comes time to pay Jim. But after Jim is paid, WHERE WILL I LIVE????

Think about the ramifications of Cullin's "Pragmatic Capitalism" and you'll recognize it for what it, and he is. Cullin is assuming that the US government will realize 100% of the value of the assets in the ground. He's talking about 100% taxation!!!! Cullin's is a fascist. A statist. . . and "Pragmatic Capitalism" is another name for fascism.