One of the things that we tend to have overlooked over the last three decades – which, if you do a little research, turns out to have been a surprisingly calm and untroubled period compared to the years preceding it – is that nobody actually knows how to make a sustainable economy… well, sustainable.
There’s a number of reasons for this, but anyone telling you that they can do that is talking out of their hat. Throughout mankind’s history, we’ve never figured this out.
The first problem is one of moving-parts. There are a lot of moving-parts in an economy. Go look in a mirror. You’re one of them. Every person in your country is a key part of the economy. What you decide to do from day to day, what you decide to spend money on from hour to hour; that’s the economy in action. Are you spending? Are you saving your money for something? Are you getting mugged or losing your purse?
Now, multiply all of that by umpty-million people.
Usually, when the economy booms, it cycles around into a bust period after that. Usually. Except when it doesn’t, which it sometimes doesn’t.
Why doesn’t it? Because umpty-million people suddenly do something different to what they usually do during a boom cycle. Why? You’ll have to go ask the mirror that question.
To limit the damage of a bust cycle, the federal treasury usually increases interest rates to limit the boom. This usually works. Except when it doesn’t. Go ask the mirror again. What did you decide to do differently? You probably don’t even remember.
You, me, and everyone else – we’re not-very-predictable moving-parts of the economy. Yet we’re key parts, because we’re the ones making decisions about what to do with our money and when.
We’re not the only parts either. No economy stands alone. Each national economy is affected by every other national economy. Raw materials come some countries and go to others. Consumer goods or cars are made in one place and sold somewhere else. Materials are shipped from South America to Asia, turned into container-loads of HB pencils, transhipped through Australia, and sold in the USA. Oil goes everywhere.
Economic troubles are like the flu. One economy in a chain starts sneezing and within a few years a dozen other economies are sneezing too. So, do what you like, you cannot insulate your economy from the performance (or failure) of others; and each of those economies is determined by umpty-million more people, whose collective whim (like your own) becomes economic reality each and every day.
So, that’s the moving-parts problem.
Now, the second, corollary problem. There’s no beta-economy. There’s no do-overs. There’s no control-group. Every change goes into the production economy. You can’t compare the results of a change with how you think things would be if you hadn’t made the change. The economy might do something completely different off the back of a couple of block-buster film releases, or a change in transistor pricing in Taiwan.
Every year is a new set of economic conditions that your country has never experienced before, and never will again.
Economists mine data, model systems, project, apply rules which worked, discard rules which no longer work, and make up new ones. It isn’t completely useless. It’s about as accurate as a 30-day forecast from a TV weatherman. That is, it’s sort of right, but don’t forget your umbrella.
Even the act of publicly releasing economic forecasts and projections changes the economy, because knowledge of those forecasts change the way people behave, and how they weight their monetary decisions. And maybe you can even predict a tiny portion of that, and then the new Harry Potter film hits cinemas, and suddenly everyone’s monetary pattern changes.
Depressions, recessions, runaway inflation, or even complete economic collapse. We generally have a pretty good handle on what causes these things – what we don’t know is how to stop them from happening. Every year, every economy is in new, uncharted territory, and is dealing with any policy mistakes that were made 20 or 25 years before.
Now to the trickiest part: Balancing the budget.
On the surface it doesn’t seem that hard.
The government spends X dollars each year on a mix of public spending, funding, subsidies, wars and whatnot. It gets Y dollars in each year in taxes, duties, investments and the like.
A balanced budget is one where Y >= X. Seems simple.
Only it isn’t.
One of three things have to happen. The government has to spend less, lowering X. It has to get more money in, raising Y. Or it has to do both.
It’s difficult to raise more annual income in less than a decade without raising taxes. The usual method is to invest money by loaning it to other countries, and those countries right now are having a hard time paying the interest on it. So raising the annual income means getting more money from the people. That means taxes and duties. You love paying taxes and duties, right? You love voting for people who promise to raise them, right?
What about reducing X? That is, cutting government expenditure.
For starters how about pay-cuts for politicians? Well, I don’t believe that it is possible for a government to be voted in that will vote for deep salary cuts to their jobs. Maybe it could happen, but I doubt that I will live to see it. Unicorns will probably fly in formation first. That’s about as likely to happen as you all voting in someone who promises to double taxes.
That leaves public spending. What’s that money being spend on now in the USA?
More than half of it is spent on Welfare, Pensions and Health. A quarter of it is in Defense. The rest goes to government wages, public-servants, paperwork, forms, education, roads and bric-a-brac.
Of the major spending categories, education is getting the least money. Why? Because 20 or 25 years ago, your parents voted that way, and Senator Proxmire killed a lot of long-term national investments of which many would now be generating large amounts of income for the country. Sure, those could be brought back, if you had money to spend on them every year and were willing to wait another 20-25 years or more for them to generate money.
Now there’s some tough choices. You can cut education (the USA is presently only in 45th place in literacy rankings, and places even worse in overall education. Even the 52 islands of the Kingdom of Tonga in the South Pacific are doing better, along with Turkmenistan, as examples), but education is already in a pretty shoddy state – and it is an investment in future income.
Or you can cut pensions and welfare, and let people go homeless or starve. Killing or evicting your citizens to balance the budget is a bit unpredictable anyway. What does that do to the economy if they don’t get as much money? Nobody’s really sure. Health? People die for a balanced budget. Try looking in the mirror afterwards and telling yourself that they had to die for the deficit.
Or, how about cuts to Defense spending? All that mucking about in Iraq is expensive. Pull out the girls and boys and let tens of thousands – or millions – die in a bloody civil war over the next few years so that you can balance the budget. At least it isn’t anyone you know, right?
And maybe none of this will work, because nobody can predict what you will do in response to any announced policy.
Seriously, if someone says they can fix the economy, control debt and get the budget balanced in 10 years, they’re either the smartest human being ever to have set foot on the planet, don’t have any idea what they’re really talking about, or they’re willing to suspend the constitution and do some very unpopular things.
Perhaps one day, we’ll turn the concept of a sustainable economy into some sort of repeatable science, but before we do, we’ve got to get it right at least once – and we never, ever have. We just keep picking up the pieces every time it breaks.