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Self-Refuting Economic Conservatism

Money is debt, an IOU. Money is created primarily in two ways (1) government creates it by spending it into existence or (2) banks create it through the credit market by lending it into existence. Government and the central bank have four main monetary policy tools for regulating the supply of money: (1) government spending [expand money supply], (2) taxation [contract money supply], (3) adjust CRR, affecting how much money is lent into existence by changing how much banks are allowed to lend, (4) adjust interest rates, affecting how much money is lent into existence by creating an incentive/disincentive to taking out loans.

Money ought to be a stable medium of exchange and a store of value. It ought not to fluctuate in value very much. The value of a dollar is 1 out of the total money supply, where the total money supply equals the total monetized wealth of the nation (usually measured in GDP). If the money supply stays the same, the value of the dollar will fluctuate with any change in GDP. If the economy is growing and the money supply does not expand, you will have deflation. Money will become more scarce, people won’t be able to buy up all the products on the market, and you’ll end up with a recession. If the economy shrinks and GDP decreases, while money supply remains constant, inflation will occur and the dollar will lose some of its value. If GDP grows and the monetary authorities increase the money supply exactly in proportion to the expansion, then the increase in supply will merely keep the value exactly the same. If GDP goes down, then the monetary authorities would need to contract the money supply to keep the dollar’s value at the same level. They can do this by raising interest rates, raising the required CRR, by increasing taxes, or through any combination of the three.

If you have economic prosperity and growth, the money supply has to expand. Otherwise you’ll go into a deflationary spiral and a recession will set in. To put it simply, a larger economy needs more money. Money is created in two ways: (1) by government spending and (2) by credit/lending. So, in order for the money supply to increase, either government spending has to increase [government debt] or private lending has to increase [private debt]. Thus, in order for a growing economy to function without collapsing into depression, either public or private debt must increase. Of these two possibilities, increasing government debt in order to allow for economic growth is preferable to increasing private debt. Why? Because large amounts of debt in the private sector are inherently destabilizing. If everyone is running up credit card debt, has multiple mortgages, and other loans, it’s unsustainable and precarious. Why? Because ordinary individuals must earn money to pay off the principle+interest on their loans. Government is different. In a crunch, private individuals default and go bankrupt. If too many do it, it wrecks the economy. If the same level of debt were held by the government, on the other hand, the government can just print more money if it gets in a pinch. This doesn’t mean that government ought to just print money on a whim. It should only do so if it really needs to. What it does mean is that government can’t go bankrupt. It won’t just default.

So, either the private sector will run a surplus and the public sector will run a deficit OR the private sector will run a deficit and the public sector will run a surplus. There’s an accounting balance here. It’s impossible for both sectors to have a surplus. If you want to decrease public deficit spending, you are ensuring that any economic growth must be funded by private sector debt. If you choose to decrease government debt, then you are ensuring that either the GDP and wealth will decrease or private sector debt will increase. Being fiscally conservative and balancing the budget forces private sector debt to increase. If all government debt were paid off, then all money would be private sector debt (loans and credit). Private sector debt can be precarious and destabilizing because it comes with interest, collateral, etc. and its very easy for private individuals to get in over their heads (lose your job, miss some payments, get foreclosed upon). Government doesn’t have this problem because it can always print money as a last resort, if necessary. It can never really default or go bankrupt. True, printing money can cause inflation, which means that the government must use a deflationary policy to counteract it, which could mean removing some money from circulation via taxation or via credit market policies. Government can always just pay the bill and then tax people more afterwards if necessary. Private individuals can actually default, go bankrupt, etc. When too many private individuals and corporations fail in this way, the economy goes into severe depression and the whole economy can fall apart, leading to instability and insurrection. So, it’s always better for most money to be government debt rather than private debt. It’s always better to have a private sector surplus which requires a public sector deficit. Thus, the most economically sound thing to do is to have more government debt than private debt and to allow for some public deficit spending if the economy is expanding. More government debt is more stable, hence more in line with traditional conservatism IN PRINCIPLE. (Of course, traditional conservatives didn't understand modern money theory or sectoral balances, so they historically reached different conclusions. However, if they had understood these facts, their principles would have led them to favor public debt/deficit over private debt/deficits.)

Let’s put this another way. In the aggregate, spending and income must balance. A worker cannot have an income unless an employer has spent an equal amount paying his wages. If the public sector has a surplus (government income exceeds government spending), that means that via an accounting identity the private sector must be running a deficit (in the aggregate the private sector is spending more than it is earning in income). The ledger has to balance overall. If government has a surplus, it means that they are collecting more in revenue (requiring the private sector to spend more on taxes) than government is spending.

This kind of highlights the absurdity of modern conservatism. They want less deficit spending and less federal debt, but they also want fewer taxes and economic growth. Logically, you can’t have it both ways. You can grind the gears of the private sector to a halt in order to pay down the debt if you want, but you can’t do it without either raising taxes drastically OR causing hyperinflation—and you can't do it without EITHER halting economic growth OR funding growth via unsustainable easy credit (the kind that led to the housing market crash)! You can’t have tax cuts AND a balanced budget. Modern conservatism is a self-contradictory and self-refuting ideology.

The values of modern conservatives are mutually exclusive of modern conservative values. They value lower taxes, economic growth, sound lending practices, and lower levels of public debt. Each of these things that they desire/value is incompatible with at least one of the other things that conservatives desire. There’s trade-offs here that make it such that conservatives logically cannot possibly succeed. The reality is that conservatism is doomed to failure and will always do nothing more than wreck things unless/until conservatism recognizes its own internal contradictions and chooses which of its desires/values are most important. (To their credit, the neoconservatives did sort of do this with taxation and debt/deficits. The neocons recognized that lower taxes means more deficit spending and increasing federal debt, and they consciously decided that lower taxes were more important than balanced budgets.)

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