Are Americans Facing a Perfect Storm? by Jacob Hornberger

Hornberger’s Blog

Monday, January 28, 2008

Are Americans Facing a Perfect Storm?
by Jacob G. Hornberger

President Bush is advising the members of Congress not to load up his “economic-stimulus” package with a bunch of lard and pork. Unfortunately, he didn’t explain why. After all, if $800 in the hands of each taxpayer will “stimulate” the economy, why won’t a bunch of checks in the hands of favorite congressional supporters do the same?

In fact, why is President Bush being so miserly? If $800 per person will “stimulate” the economy, how about sending $10,0000 — no, $50,000—to every person, business, and organization. Heck, let’s make it an even $100,000. Think of the boost that “stimulus” will provide the economy!

Before everyone starts kneeling in gratitude to their federal daddy for sending them this allowance money, it’s important that people ask themselves an important question: Where is their daddy getting all this money to send them?

Given that the government is spending far is excess of what it brings in, there are only 3 possibilities.

First, taxes. With this approach, the government taxes each person $800 and then sends each person back $800. It should be obvious that under this method, a person gains nothing — unless the government taxes other people to get the money to send to him.

Second, borrowing. With this approach, the government must induce people to lend the $800 per person to the government, which it then sends back to the taxpayer. That means less money is available for private capital, e.g., home mortgages, which means more foreclosures. It also means that all that debt must ultimately be paid back, which means higher taxes down the line.

Third, printing the money through the Federal Reserve System. With this approach, the government simply prints the $800 and sends it out, causing the value of the dollar to continue plummeting. People pay the price in terms of higher prices for gas, groceries, cars, restaurants, movies, utilities, vacations, and the like. This is the most likely route that federal officials will take, given that most people won’t be able to figure out how their federal parent is sending them the free money.

The question is: Can this game, which has gone on for decades, go on indefinitely?

Consider, for example, the banking industry. Prior to the establishment of the Federal Deposit Insurance Corporation, banks that could not honor their obligations to depositors would go under. Depositors would lose a part or all their money. That’s the nature of a free-market system—if you make the wrong investment, you bear the responsibility.

Then, along comes the federal daddy and announces that no longer will people lose their money from having chosen bad banks in which to deposit their money. Instead, the federal government would “insure” them against such occurrences. The government would be the people’s protector.

It’s not difficult to understand how such an “insurance” system works with respect to the fall of individual banks. When a bank goes down, the government simply taxes people to cover the losses of depositors in that bank.

But what happens if there is an industry-wide banking collapse? In that case, every depositor will be demanding that the government refund the money he has in the bank, up to $100,000, pursuant to his FDIC “insurance” policy.

But where will the government get the money to refund everybody’s money? You guessed it — in one of the three ways enumerated above — by taxing everyone, by borrowing from everyone, or by simply printing the money.

To discourage bank runs, over the years the government has steadily increased the amount of deposit insurance. But all it would take is one big panicky financial moment for depositors to appear at banks all across the land demanding their money for an industry-wide banking crisis to materialize. Then what?

Ever since the 1930s, people have put their faith in the paternalistic welfare state to take care of them, to watch over them, to guard them against the visisitudes of life. Today, every aspect of the welfare state is in crisis, including Social Security, Medicare, Medicaid, education, home loans, the dollar, and more. For that matter, every aspect of the warfare state is also in crisis, including Iraq, Afghanistan, terrorism, civil liberties, privacy, torture, and more.

Time will tell whether Americans are facing a perfect storm of crises, both foreign and domestic. If so, a bit of pork and lard in an economic “stimulus” bill will be the last thing on people’s mind.

Mr. Hornberger is founder and president of The Future of Freedom Foundation.

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