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Budget Collapse: Too Much Free Money


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American Spectator:

The super-committee of Congress is the latest group to confess abject defeat by the Treasury budget deficit. Who can be surprised by this total failure? During the past generation Congress has made as many as fifteen legislative attempts to control government spending -- aimed ultimately at a balanced budget. The most notable efforts were those sponsored by the all-time budget hawk, Senator Phil Gramm of Texas. But every administrative and legislative effort by the authorities, no matter how well-intentioned, has collapsed. Why is this so?

Nobel economist Milton Friedman believed the solution to the budget deficit problem was to deny Congress tax revenues. So he advised Congressmen and Presidents to oppose all tax increases -- thereby denying bloated government the funds with which to increase spending. But Friedman's advice has failed, too. We know this because marginal tax rates have been reduced from as high as 70% in 1964 to 15-20-39% in 2011 -- depending on the type of income. But congressional spending has nevertheless increased every year -- such that, today, only 60% of the Federal budget is financed by taxes, the remainder by Treasury debt. Total direct Federal debt is now about equal to total U.S. output.

The intractable budget deficit and the inexorable rise of government spending has a simpler explanation. Congress and the Treasury are in possession of several open-ended charge accounts -- "permanent credit card financing" -- with no limits. With its charge cards the Treasury can borrow new credit (money) from the banking system -- much of what it needs every year to finance the ever-rising budget deficit.snip
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