We can only cut debt by borrowing
blogs.ft.com
blogs.ft.com
He starts with the misguided notion that net debt is zero. The point of interest-bearing debt is that the debtor might NOT be able to pay the debt off. He then proposes ways to reduce risk to zero, with lenders suffering no consequences of risky loans - a furtherance of policies which got us where we are, determined to take risks then legislate away the consequences.
The system is vibrant because of the willingness to accept risk. To enforce a risk-averse system is to destroy the benefits of risk. Isn't risk the core of ycombinator's purpose? to take risks, and to manage them better than others? The system cannot be cleaned up until the buck stops somewhere, until the music stops and those without chairs leave the game.
Borrowing, in a fractional-reserve system, means that for every real dollar there are tens or hundreds of claims on that dollar. You can't pay everyone off because there isn't enough money - unless the government opts for hyperinflation, achieving the same basic ends thru redistribution of abject losses.
I agree that (credit - debt) = zero. The problem is that credit is not a fixed amount due to the fact that it is leveraged... see fractional reserve banking. http://en.wikipedia.org/wiki/Fractional-reserve_banking
The leverage formula is (1 / reserve) where reserve is a fraction tending to zero. This is a non-linear relationship and we all know that the lim x -> 0 (1/x) = infinity.
If lenders (e.g. banks) hold a 20% reserve, they will "expand" the money supply by 1/0.2 or 5x. If they hold a 10% reserve, they will "expand" the money supply by 1/0.1 or 10x. If they hold a 1% reserve, they will "expand" the money supply by 100x. As the reserve fraction goes to zero, the effective credit part of Martin Wolf's equation goes to infinity.
A lot of exactly that type of lending was being practiced during the "bubble", especially in the housing market where mortgage underwriters were loaning more money than the houses were worth. This was happening before the housing crash - mortgage originators were advertising "we will loan you 100% the value of your house" (sometimes more than 100%).
You seem oblivious to the fact that current proposals (known as Basel III, after the city in Switzerland) requires banks to raise their tier 1 capital ratios, ie reduce their capacity for leverage. Currently central banks are acting as lenders of last resort, but once healthy growth resumes they will gradually sterilize that funding. That will be a limiting factor on growth, but one that seems preferable to a total credit freeze.
http://www.bloomberg.com/news/2010-09-23/ubs-credit-suisse-m...
In short, banks can leverage as much as they want, and the FDIC will cover their butts if they fail, but the FDIC does not charge adequate premiums based on risk. Further the federal reserve isn't really a "lender of last resort"
In fact, the term "lender of last resort" is inaccurate, as the federal reserve offers rates on money that are lower than the market. They are doing this now as a response to a crisis that was caused by them doing it in the past (as I pointed out elsewhere.)
A lender of "last resort" would be one you could always go to, but who was expensive and therefore you were incentivized - "first resort" - to go to the market.
Here's a pretty good post (and comments) on how FR relates to modern money:
To give just one example, if you follow US Congressional news you'll periodically hear about something called a "debt ceiling" that supposedly Congress has to follow, which puts a limit on how much debt/deficit is allowed to exist at the Federal budget level. The problem is that they also periodically raise this "ceiling", whenever it is convenient. Whenever there is some supposedly exceptional or temporary state. And these exceptional cases and temporary conditions keep happening. Therefore the Federal debt just keeps going up and up (mostly: except during part of the Clinton presidency.) Memo to Congress, I don't think the word "ceiling" means what you think it means!
The crack baby treatment of NASA is another example. "Give us a big plan to return to the Moon and Mars and we'll fund it. Okay, thanks, great plan, we'll start funding it." Few years go by. "Oops, sorry, we changed our mind, uh, could you repurpose that into a cute little station escape pod for us? k thx bye."
The federal reserve put us on a boom-bust business cycle, and those who understand the cycle profit from it. The fed drives up the boom, as they did with housing, and everybody who is smart makes money, then they raise rates and trigger a bust, and when that happens to the point where serious damage is going on, everybody buys up assets really cheap.
The politicians profit from this as well- during the boom they say "look at this boom I created!" and get reelected. During the bust they say "look at this bust the other guy created, give me more power!" and they get more power.
The ultimate boom, of course, is in the value of the dollar which is actually nothing more than a debt instrument itself. When it crashes there will be huge political opportunity to remake the country, including constitutional amendments or even a new constitutional convention. People will suffer, but there's nothing like a good crisis for the politicians.
This would result in a sharp GDP contraction for a relatively short period, a sharp hike in unemployment, but then growth would resume fairly quickly, once the realization sinks in that we are not dead after all.
Government can do two things to make this process faster: 1) make the justice system work faster in resolving the various disputes that will inevitably arise in imposing hair-cuts on bondholders 2) Make sure no one starves, and no one freezes. These things it can do.
The present course of cutting-debt-by-borrowing has a clear destination: zombiehood without an exit strategy. Look at Japan for the best illustration of this. It is becoming increasingly clear that Japan is not going to resolve its problems without a major crisis. It should have taken that sharp GDP contraction in 1991 instead.
They'd seize every US or American-owned asset that they could get their hands on and stop sending us stuff on credit. The former is much smaller than the debt that they hold (so we could compensate private holders and still end up ahead) and the latter is arguably a good thing.
Not at all. They'd remember and never loan us money again. Given our spending habits, that would be a good thing.
Or maybe they would loan money in the future if they decided that was in their best interests.
Remember, other countries have defaulted and gotten loans later, some more than once. Why would this be any different?
You're assuming that the Chinese will be benevolent if we don't default and aggressively malevolent if we do. That's naive. If they're willing to be aggressively malevolent, they'll be so without an excuse so it's absurd to worry about excuses.
If they're unwilling, their worst is actually good for us - it will force us to live within our means.
BTW - A US-class blue water navy is really hard to build. So, the likely malevolence is nuclear.
That might include coming over to get it by force.
How? They don't have a blue water Navy.
There are three mechanisms: sale; bankruptcy; and frugality. ... The second approach is mass bankruptcy. In this case, creditors are forced to write down their loans to the value of the asset. That is clearly an important part of any de-leveraging. But since highly leveraged financial intermediaries stand between the ultimate creditors (households) and the ultimate debtors (other households), mass bankruptcy is going to wipe out the capital of intermediaries. That is likely to trigger panic, as losses cascade across the financial system.
Organising such a bankruptcy procedure, to allow for a mass adjustment of claims, is indeed one of the necessary conditions for managing a financial crisis efficiently. But it is going to be politically and technically complicated. In the end, however, a substantial part of the debt and the corresponding credit should be eliminated in this way. The big policy decision is how far the state wishes to socialise the losses of creditors. The answer will certainly include some socialisation, since governments insure deposits in financial institutions.
Read this carefully, because I'm fairly certain the author is trying to disguise something. His argument is this: Households cut spending and drive down rates, therefore creditors have less income and cut spending, therefore, creditors demand higher rate and more household debt.
You can see the sleight of hand, creditors desiring a higher rate does not force a higher rate. In fact, as he already admitted, debtor payments have pushed down the rate. What the author fails to admit is that rates stay low AND debtors pay down their balances. Debtors do not need to somehow 'outsave' their creditors in order to pay down their debt. They simply pay down their debt.
There may be arguments for stimulus packages and other counter-cyclical govt spending, but the author doesn't make a fair point for them. I certainly don't see why it would be necessary for govt borrowing to offset an increase in the private savings rate.
With a little imagination and selectivity, a situation like this can be a good opportunity to reduce transfer payments and endorse productivity in both the social and industrial sectors.
The counter argument to it is very simple: this spending is spending money that comes out of the economy, and taking money out of the economy hurts economic growth. Further, many argue that the spending produces less froth than the money destroys when taken out- lower profits at the personal or corporate level mean less investment in growth via consumer spending or business expansion.
Further we have just witnessed a perfect implementation of this theory- after the dot com crash, government lowered interest rates below inflation, making free money and spent massively running up record deficits. It managed to spark a housing boom and a lot of consumer spending... But the situation we find ourselves in now is simply the hangover from that party.
If we get drunk again, it isn't going to banish hangovers and each time we do it, it gets worse while the body gets closer to death.
On the contrary, I was astonished at their readiness to give money away. Don't you recall the endless stream of refinancing commercials on TV? shows like 'flip that house'? The way everyone and their dog suddenly seemed eager to have a realtor's license? The guy at my local pizza shop had his realtor business cards on the counter next to the delivery menus.
Edit: I see the truth is uncomfortable for some people. But the fact is that government promotion of home ownership is one thing, and instant approval of jumbo loans with 0% down are quite another. I got burned in a property boom when I was about 20 and this time I decided to stay out of the market.
I'm with you and think they should just let prices fall. I can't find the video right now, but at one point President Bush was asked why he wasn't doing anything to prop up home prices. He responded that it's giving people who were priced out the opportunity to buy so he didn't see the need to do anything. His statement was early on in the recession and eventually he was pressed to do something though.
According to the banks, this is the tgovernment's fault, because the government is not throwing any money at them to invest in the future value of homes: http://www.housingwire.com/2010/09/27/bofa-analysts-call-for...
If it's the government propping up house prices, kidly explain why prices are stable when there are ~300,000 homes in various stages of foreclosure: http://www.realtytrac.com/content/press-releases/foreclosure...
Seriously, what information are you basing these conclusions on?
That right there should tell you that prices are still artificially high. In this case banks are controlling the market to hold them up. By the way, putting them all on the market would not necessarily lead to another wave of foreclosures.
If it's the government propping up house prices, kidly explain why prices are stable when there are ~300,000 homes in various stages of foreclosure:
Foreclosures are primarily driven by the owners ability to make their mortgage payment. Current house prices have little to do with that ability. A lower price could prevent the owner from being able to sell, but that assumes there would have been buyers at the higher price.
Seriously, what information are you basing these conclusions on?
Prices have come down, but the government has done it's best to hold interest rates artificially low so that people could refi and possibly get out of the idiotic loans they took on. These low rates have also helped those with money buy houses at the still over priced prices thus propping them up. There are also government sponsored loan modifications that help to keep people in homes that they can't afford. House prices are 'sticky' on the way down by nature, but the government has helped make them stickier through all the help they have been giving.
Historically house prices have been set by the average income of a given area (and in general prices raised along with inflation like salaries)[1]. This is because people buy a house based on the monthly payment that they can afford. Low interest rates lead to higher priced homes and and vice versa (as an aside the best time to buy a house would be when irates are sky high and likely to fall because the absolute price of the house would have to be lower for anyone to afford it), but what stays roughly the same is the payment.
What happened during the bubble is that money was so cheap that house prices ran way out in front of most peoples ability to afford a house without taking on a crazy loan. Even in areas where prices have fallen, if you compare prices to average income you'll see that many houses are still way beyond the average persons ability to afford them. In addition to the supply situation you mentioned, if you also add in that many people have been permanently put out of the market with banks now requiring down payments, better credit scores, and conventional loans the demand side of the equation has also fallen (and may never return to those levels).
[1] Like most rules there are exceptions, in particular location. An area where many rich people buy second homes for vacation purposes may not reflect house price as a function of average salary for the area. Common sense will tell you if you're in one of those neighborhoods versus one where the people living there work nearby.
Further we have just witnessed a perfect implementation of this theory- after the dot com crash, government lowered interest rates below inflation, making free money and spent massively running up record deficits.
Ah...see I have a problem with this - with luck we can disagree without falling into partisan bickering. 'Government' is not this indifferent entity that does whatever it wants, it's people implementing policies, and I think you're glossing over the details.
So we had a small notional surplus at the end of the last decade, and in 2000 we got a change of administration. We agree (I hope) that the seeds of the dot-com bust were already rooted; I don't blame any political figures in particular for that. Greenspan warned about 'irrational exuberance' etc., and pretty much everyone I knew told him to shut and stop being a party pooper. Sometimes people just have to learn the hard way.
But the new administration came in and gave people a tax cut, on the principle that if the treasury was running a surplus then it should be giving the American people's money to them (the same tax cuts which are supposed to be expiring soon). Just so we're on the same page, when I refer to EGGTRA I'm talking about the 2001 tax cut and by JGGTRA I mean the 2003 (post dot-com bust) one:
http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_...
http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reco...
Now, I say you're 'glossing over' things with your analysis, because while there are policy justifications for both cutting taxes to stimulate growth and paying off debt (less lovely cash in your pocket, but less long-term interest accruing while you sleep), it seems rather disingenuous to complain about government failing to pay off the debt and ignore the fact that the administration of the day opted to cut taxes and make up any shortfall with borrowing.
Even the budget director at the time, Paul O'Neil, thought this was a dreadful idea, and by 2002 was expressing his alarm at the ballooning deficit, allegedly causing VP Cheney to respond with the argument that "Reagan proved deficits don't matter." O'Neil departed the White House by the end of that year. Now, several people have argued that the Clinton 'surplus' was no such thing, and amounted to little more than an accounting trick (for example http://www.craigsteiner.us/articles/16). There is some merit to this argument, but it is not disputed the the rate of increase in the national debt slowed down during that period, nor that it was ~$5.8t when the White House changed hands in early 2001.
After that, deficits ballooned and the debt swelled considerably. A lot of people (like me) expressed the belief that cutting taxes like this was a terrible idea - a justifiable war of the kind the US undertook after 9/11 is one of the few occasions where you can persuade people to tolerate higher taxes, because a situation of genuine military necessity exists. It would have been better (in my view) to either use available revenue to slow the rate of deficit growth, or at least to pay for the Afghan war. Come 2003, and the administration launched a second war and another tax cut. At the time, objections to this were generally dismissed as loony leftism or sour grapes or lack of patriotism. I don't want to rehash all of those political issues, but from an economic point of view war is expensive and I haven't seen evidence to suggest that the tax cuts significantly boosted revenue - in fact, I agree with you that low, low interest rates had more to do with the asset bubble which followed.
Now those tax cuts are set to expire, and because one party has suggested that perhaps it would be sensible to extend them for the great majority of people who earn under $250k/year (and that the increase on those making above would still leave them paying less than in Reagan era), the other party has taken its ball and gone home - rather than roll them back partially for now and fully later, they've instead committed to making them permanent, which means a ~$4t hole in projected revenues, right around the time we are entering a demographic retirement bulge, and a good deal of our infrastructure is in very poor shape.
It's all very well to wag the finger and say it's time to lay off the fiscal moonshine, but I find it really hard to take seriously lectures about debt which blithely a policy of repeatedly substituting borrowing for revenue.
Deficits "ballooned" for a while, and then started back down - the 2006 deficit was "only" $100B/year. (The peak was around $5-600B/year.) The deficits took a big jump in 2007 after the Dems took Congress. We currently "hope" to get the deficit down to $100B/month.
If $100B/year is too much, what do you call $100B/month?
> and that the increase on those making above would still leave them paying less than in Reagan era
In marginal rates, yes, but their share of the total tax burden has increased.
Marginal rates are the only thing that counts on the individual level. Share of the tax burden is irrelevant and largely reflects their share of national income. Essentially, you're saying that yes, they pay less taxes than they used to, but it's terrible that their taxes aren't even lower.
I am not in favor of endlessly rising taxation or soaking the rich. But I'm not in favor of voodoo economics either, like complaining about the debt while simultaneously arguing for drastically cutting revenue.
A major tax hike, on top of the deficit sending and resulting inflation will greatly increase unmetoyment and worsen the depression.
But you don't get off the hook for deficit spending just because there is a recession. First off, as I've pointed out, deficit spending makes the economy worse. Secondly, there are massive amounts of new spending that has been created. The vast majority of the current yearly deficit is from new spending on stupid, pointless things that will also only serve to hurt the economy.
Frankly, since government has shown no ability or interest in being fiscally responsible, they really should lose the ability to levy an income tax at all. This would benefit poor people more than rich people, and would greatly stimulate the economy, and the government would only have to shrink to the size it was a decade ago, or so.
Since they have proven to be completely incompetent at running government, they have lost the right to take our money and "manage it for us". Social Security is a complete scam- you'd be better off putting the money in a savings account.
Therefore, the idea that government should be taxing us to provide us with "Services" is absurd -- they never deliver the services, and they constantly increase the taxes.
...a position I do not hold, and which I object to being characterized with.
seem to presume that leaving the taxes where they are now is "drastically cutting revenue". Actually it would be maintaining the status quo.
No, because the status quo includes a sunset for the tax cuts in question, that was put there by the Congress that passed EGGTRA and JGGTRA in the name of fiscal responsibility. The legislation which implemented those tax cuts was crafted as a temporary measure, designed to promote more economic activity and pay for themselves after economic growth had returned to earlier levels.
Making the tax cuts permanent equates to a drastic cut in revenue because for the entire life of the tax cut, budget and debt projections were calculated and presented to the public on the basis that the cuts would be allowed to expire, as they were designed to do by law. Anyone who questioned the deficits being run up by the previous administration was told to stop worrying, and presented with figures showing that it would all come back into balance...later.
And yet, when those expiration dates arrived starting in 2006, and the economy had grown so much that a classic asset bubble was inflating, and borrowing had significantly increased during the life of the tax cuts, the very same people insisted that we had to extend the tax cuts because to do otherwise would slow economic growth. They weren't even willing to contemplate increasing the tax rate on short-term capital gains.
As of now, they (and seemingly you) are insisting those tax cuts should be made permanent, while completely ignoring the fact that they came with a sell-by date. Answer me this: if higher taxes are such a terrible idea, and Congress was able to cut them as they did during the previous administration, why didn't they reduce spending at the same time? Why is it that the same people who cut taxes chose to actually increase spending significantly, and borrow to pay for it?
About what we're going to run up in the next couple of years. The difference being that the deficit was going down and now it's roughly stable (Obama's predictions) at roughly twice as high.
> And since when does Congress write the federal budget?
They pass it.
Bush wasn't all that good on spending as the prescription drug monstrosity proved. However, he was better than Obama.
> As for your comparison of boom-period deficits with emergency post-recession deficits, surely you can't expect me to take this seriously.
Sure I can - the recession ended a year ago. More to the point, the spending isn't going down post-recession. That's why the projected deficits are staying high.
> Share of the tax burden is irrelevant
You're claiming that the rich aren't paying enough. I'm pointing out that they're paying more than they did before.
> Marginal rates are the only thing that counts on the individual level.
The rate that actually matters is not the worst case marginal rate, but the rate seen by an individual. The high rates in the past were accompanied by a lot of loopholes and the like that disappeared with Reagan.
Doubtless you also have a justification for things like $38,000 tax breaks on Hummers - http://www.seattlepi.com/local/104601_hummer17.shtml
Sure I can - the recession ended a year ago. More to the point, the spending isn't going down post-recession.
Right, because demand and thus growth are well known for immediately returning to their previous levels following a recession. And increasing your spending at the same time you cut taxes, using borrowed money, is fiscally responsible and doesn't have the slightest impact on future budgets.
You're claiming that the rich aren't paying enough. I'm pointing out that they're paying more than they did before.
a) No I'm not, I think everyone is going to have to pay some more taxes;
b) They're paying more in nominal terms because they have a greater share of national income. Let's consider an example.
I am rich, you are not. My income works out at $1,000/day, yours is more like $200/day. I pay, say, $400/day in taxes, you pay something like $50. We are more or less OK with that.
Then I fire you (and a lot of other people) and outsource your factory job to someone in Asia, who is willing to work for $20/day and pays no US income tax. You get another job, probably at a Walmart, that pays $100/day and now you only pay $10 of it in taxes, mostly payroll. My income has gone up to $2,000/day and I'm paying $700 of that in taxes (because the tax rate got cut a little bit, from 40% to 35%).
I think it's just terrible that I'm paying an extra $300 in taxes already and now Obama wants to put it up to a total of $800, which will leave me taking home only twice as much as I was before. You should feel sorry for me, because you are 80% better off than you were before: you used to pay $50 in taxes, but now you only pay $10, you freeloader. My taxes are 70 times higher than yours, and Obama wants to make it 80 times higher.
Stupid, right? But that entire last paragraph is technically true. It just invites you to forget, briefly, about the changes in how much we take home each day. If I'm feeling particularly lucky, I might try changing the subject to something else, and then reminding you of how little you earn so I can attribute the blame to Obama for that, too.
The deficit is defined as the difference between tax revenues and govt spending. Are you suggesting that tax revenues were inflated?
> Right, because demand and thus growth are well known for immediately returning to their previous levels following a recession.
A recession is defined as two or more consecutive quarters of 0 growth or contraction. The end of a recession is, by definition, a quarter of growth. We haven't had any contraction in the last year.
However, growth after a recession is usually fairly vigorous and the growth after this recession has been pretty anemic.
> And as I have observed elsewhere, doing absolutely nothing to trim its own spending.
That's too kind - spending increased significantly under W. By previous standards, those increases were obscene. By current/Obama standards, the increases were modest. (FWIW, military spending as a fraction of govt spending continues to drop. We're way lower now than after vietnam, let alone during.)
Much, but not all, of the W deficit came from Iraq and Afghanistan, which were/are winding down. However, W's deficits started dropping before then. They didn't explode again until the dems took congress. (Congressional repubs were a lame brake on W's spending tendencies. Congressional Dems were no brake at all - their complaint about the prescription drug benefit monstrosity was that it wasn't big enough.)
I note that you think that W's spending is unreasonable but are happy with Obama spending far more. Curious.
But I'll bite - what spending, other than Iraq and Afghanistan, would you have cut from W's term?
I've mentioned one possible answer, the prescription drug plan.
Or, is your only real complaint that W didn't collect enough tax revenue?
The "outsource" story is cute, but irrelevant because increased tax rates don't decrease off-shoring.
You forgot the other part - rich people are (potential) job creators. The middle class,not so much. The poor, almost not at all.
Money goes to where it's welcome. I'd like that to be the US because there's a big benefit to having money around.
You seem hung up on relative levels. I'm not. I don't care what you have. I care what I have. I'd much rather be poor in the US than in the middle almost anywhere else. How about you?
Debating whether we should have cut taxes to stimulate the economy or paid down the outstanding debt would be worth debating if we were comparing two situations with no ongoing deficit.
Everyone in government's job is to operate the government with a balanced budget, every year. IF they do not do this, they have failed. There are plenty of political incentives for irresponsible individuals to endlessly spend to buy political power, influence and to feather their own nests.
In an ongoing deficit situation they have already failed in their primary job of delivering a balanced government budget every year (on average). So I see little point in debating whether, having achieved that, tax cuts or paying down debt is more beneficial to the economy.
That said, the regulatory and tax burden on our economy is unacceptable. You can't pretend to give a damn about the quality of life of the american people and support high taxes, inflation and deficit spending. This applies to both parties.
You argue for rasing taxes, but we are currently running record annual deficits and have only continued to pile on future obligations, bringing the current net present value of all future obligations to over $200 Trillion. (in a recent estimate, though I can't say how accurate it is, whatever the actual figure is, it is well beyond "irresponsible" and into "suicidal" territory.)
Yes, we are running record annual deficits - because we are in exceptional economic circumstances, and as a result of large one-off spending bills. To recycle the medical analogy, if you go to the hospital with a heart attack your bill may be $10,000 per day, but that's because you're in intensive care. You have not suddenly shifted to a $3.65m annual spending pattern which you intend to maintain indefinitely. Doubtless you'll point to the added structural costs of healthcare legislation; and yet, initiatives to significantly reduce the structural costs of defense spending - and shrink one of the largest bureaucracies in the government, from the top down, saving $100 billion over the next 5 years - have gone largely unremarked. Why is that? It's a pretty large saving, and begins with cutting top-heavy management and scrapping zombie programs. There are howls of fury across the education sector because the administration insists on moving towards performance-based funding, and the axe is falling on poor teachers and diploma mills. The opposition insists that's wasteful, and says it would abolish the department of education and all student loan services altogether, an absurdist position.
You say the regulatory and tax burdens on the economy are unacceptable. Which ones? Plainly, different levels of taxation are acceptable in some contexts, the proof being the existence of stable countries with higher taxes than ours. For any given tax rate, some people asked to pay it will insist that it is too high, which is why we currently have an estate tax of 0%. How much should the tax burden be, and what if a majority of the electorate decides they are willing to pay rather more than that in order to pay for some things they want? Kindly note, that I'm not saying 'to make other people pay.' There is always going to be a minority that wants to pay nothing at all and insists it wants nothing of anything the government has to offer, but mystifyingly, shows no serious inclination to go anywhere else. I'm not in love with excess regulation either, but what are the thresholds at which it becomes burdensome? You're opposed to fractional-reserve banking for example, so does that mean you'd like to see laws preventing any banks from lending more than what they have on deposit, in order to keep their leverage ratio lower than 1? If we abolish this or that government agency and stop regulating some sector of the economy, what remedy will be available to those who find themselves the victims of shoddy products, or pollution, or pharmaceuticals? What if they experience property damage? I can't see you being happy if I take up some line of business that involves me dumping toxic waste on your doorstep, but the sad fact is that some people are willing to do such things in pursuit of a fast buck, which is often why those regulatory agencies were set up in the first place. Usually the response to this question is that of course we need sensible regulation, albeit less of it; can we get some specifics? All I've heard from fiscally-minded libertarians, for example, is 'Audit (or abolish) the federal reserve, and return to sound money.' Fine, how will this work in practice? Objections to the status quo posit enormously better outcomes if we would but change this, abolish that, or outlaw the other, but few of these proposals go into any detail about how these outcomes will be achieved. If a proposal is all benefits and no costs, then it's not a policy, it's a fantasy.
And you close with the unsourced, scarifying figure of $200 trillion in future obligations, as if this were all payable at once. First, it's from Laurence Koltikoff, a professor of economics at BU and is accessible here: http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and... ...and he hates supply-side economics, points out that taxes will need to be raised, and observes that the fundamental problem is one of changing demographics as baby boomers retire. He doesn't like demand-siders much either, but his proposed solution is to 'drastically simplify' our various systems. No word on how, and no mention of the fact that this total is the sum of obligations stretching out to 2080, or that the demographic disparity resulting from the baby boom will have run its course by about 2040. By that time the ratio of retirees to workers will have stabilized, because the boomers will almost all be dead and succeeding generations have stayed close to the replacement rate, unlike Japan and China who are facing a long-term demographic collapse far worse than ours, and which goes a lot further towards explaining the moribundity of Japan's economy than even their misapplication of Keynesian policy (such as vast infrastructure projects in remote rural areas). Nor is there any meaningful discussion of what economic growth would take place over the same period, just the unjustified assumption that's it's a one-way street to bankruptcy, unless we institute some new 'simple' rules which everyone will magically agree about and which will fix all our problems...somehow.
Such hand-waving proposals ignore the reality of a mixed economy in a high-tech world. Of course things were simpler in the past - in the 19th century we had a resource-based economy with a continent-sized chunk of thinly-populated land which was largely free for the taking. That's no longer the case. After the war we had intact industrial capacity while that of our competitors had been heavily bombed. That's no longer the case either. These appeals to simplicity are actually pandering to the most simplistic readers. Right-wingers say they'll abolish big chunks of government, as if you could perform surgery using a pair of garden shears. Left-wingers say they'll abolish trade and make the rich pay for everything, as if the economy were a battered wife and capitalism a mean husband who will be chased off by some cuddly Uncle Sam. These are not meaningful political positions, they're infantile denials of reality.
Reality-based policymaking requires grappling with difficult choices and uncomfortable truths. Professor Koltikoff surely knows full well that the solution to the shortfall of people paying into Social Security etc. is a trade-based reform of the immigration system. We currently spend a ton of money on a vast bureaucracy tasked with administering an absurdly arcane set of laws which keep about 3% of the population in the black market and admit others in a hopelessly inefficient fashion. Although the sunk costs of immigrants (education and pediatric healthcare) were mostly borne by their country of origin, and the treasury as well as business could be collecting a lot more money, we continue to ignore the structural implications for the economy. We need motivated workers, we need them to have slightly more kids than average to finance the retirement of the boomers by both contributions and consumption, and populations have already begun stabilizing in most of the source countries so they're not going to have a surplus of unemployed labor left by 2030, when wage inflation will become the most pressing issue.
We have copious economic evidence for implementing such a policy and general agreement among economic thinkers, both left and right, about its immediate necessity and competitive desirability, but the public debate is dominated by xenophobia and economic illiteracy. The fringe right wants to build a giant fence and conduct mass deportations, the fringe left thinks a labor shortage will be a good thing because it will push up wages, we can inflate away our debt and do without international trade altogether. What unifies fringe thinkers, although they all hate being reminded of it, is their insistence that the outside world doesn't matter (and that we can kick its ass if it insists on bothering us), and that a targeted dose of extreme authoritarianism directed against a small minority (immigrants, capitalists, elitists, take your pick) is all that's needed to restore harmony and re-establish the blissful economic landscape we recall from childhood, when society had decent values.
This is not a healthy or productive approach. I could give other examples drawn from different parts of the economy or body politic, but demographics are at the core of our long-term economic situation. We are not going to tax our way out of the problem as some liberals imagine, because the rest of the world economy has developed enough to create meaningful alternatives. Nor are we going to cut our way out of it as some conservatives imagine, because abandoning economies of scale would murder our cash flow. These populist viewpoints are regressive and past implementations have proved to be extremely destructive.