The Skeptical Optimist

The fun way to pay for Katrina, and a new Constitutional amendment

Today, America is having a self-pity party—or maybe it's better described as a brawl.  Whichever it is, the hysterical headlines about how to "pay for Katrina" given our crushing "national debt" fill twelve pages of Google News results.  The Republican party is about to tear itself apart over the fiscal responsibility issue—to the delight of the hypocritical Democrats, who have conveniently replaced the Keynesian deficits-are-good argument with a far more politically sensible stance: Deficits-are-bad-when-we're-out-of-power. 

Call me a party pooper; hysteria isn't my bag.  What I have to offer instead are a few facts.  To me, those facts are very encouraging news, but I don't think too many others are paying attention. 

There are two economic results which are far more important than the dollar numbers flying around in the headlines and in the interparty and intraparty accusations.  Those two results are:

•  the debt burden (debt-to-GDP ratio), and
•  the growth in federal tax receipts. 

Both of those results depend heavily on a growing economy: when the economy (GDP) grows, it reduces the debt burden, and it increases federal tax receipts.  Specifically: GDP growth reduced the USA's debt burden to 64.5% GDP in September, from 64.9% last month, and it is driving a trend in tax receipts that, if sustained, would soon close the gap with federal spending.  In short: growth is having favorable effects on the debt burden and on the deficit. 

Our debt burden, and how we compare with other countries, is shown in this month's National Debt Thermometer.  The promising trend in tax receipts is shown in the chart below—including a hypothetical, Katrina-relief-driven blip I added to the federal spending trend. 

Click to enlarge.

Now that you've seen the chart, it should be clear that the easy, fun way to pay for Katrina is: Economic growth, sustained at its present level or better—because that's what causes the blue line (tax receipts) to skyrocket.  How come it's not making headlines?  How come the politicians are ignoring it?  (I've been wondering about that for a long, long time, by the way.)

Can you think of any changes that would make the USA even more growth-friendly than it is today?  Revenue-neutral tax simplification would be my first suggestion, but there are plenty more.  The hard part is getting the conversation started, especially in the midst of all the hysteria. 

Let's amend the Constitution
I'm running out of ideas for getting politicians and journalists to start talking about the debt-to-GDP ratio, instead of the raw dollars of debt.  Just that one little change would force GDP and growth into the conversation.  Maybe a Constitutional amendment is in order; something like this:

"Article XXVIII:  Anyone who talks or writes about the raw dollars of debt, the raw dollars of deficit, or the raw dollars of interest payments, instead of debt as % GDP, deficit as % GDP, or interest as % of tax receipts, will have his ________ or her ________ chopped off in the town square within twenty-four hours after conviction of the crime.  The Congress shall have the power to enforce this article by appropriate legislation, except the President shall have the duty to enforce this article when the violator is a member of the Congress." 

(I'm open to suggestions on how to fill in the blanks above.)

Sep 2005 GDP, National Debt Thermometer

The Bureau of Economic Analysis published the final GDP numbers for Q2-2005 today—and, as in previous months, I think growth is understated. 

(And here's why I think it's understated.)

[UPDATE: Click here for a brief, explicit summary of the math.]

Also, because GDP was adjusted upwards a little while the debt stayed at essentially the same level as last month, the debt burden dropped almost a half point to 64.5% of GDP.  Moreover, if GDP continues increasing at a faster pace than everybody had thought it would, tax receipts will do the same, causing official estimates of the deficit to be overstated.  That means my forecasted end-of-calendar-year debt burden, 65.2% GDP, would turn out to have been too high—and that's just fine with me. 

Here are the usual charts: Debt Thermometer, Inflation Meter, and Debt Microscope.

Click to enlarge.

Click to enlarge.

Porkbusting? Dream on, your honor.

The “Porkbuster” movement has been gaining momentum, largely due to the impetus imparted by Glenn Reynolds and N.Z. Bear.  More power to them—but I hope they’ll give me a pass as I respectfully decline my seat on the bandwagon.  I fear it is being oversimplified; in the recent past, that has led to unpleasant consequences. 

I’ll grant that some spending is both pork and waste.  But it’s also true that not all pork is waste, and that not all waste is pork.  Lastly, and most importantly, a substantial portion of federal spending is neither pork nor waste.   

To disentangle the above paragraph, here's a headpicture that helps me keep it sorted out.  [Definition: “headpicture” = “brain dump”]

My problem with jumping onto the Porkbuster bandwagon too hastily is that those important delineations can get lost.  The Clinton years provide us with a good example.  Back in the early ‘90s, “smaller government” is what we said we wanted—and that’s what our government gave us.  It turned out to be a mistake, and it was our own fault. 

In 1992, we spent 29.8% of tax receipts on national security.  The Clinton administration—having listened to our complaints about government spending—felt our pain.  With bipartisan support in Congress, national security spending dropped to 16.5% of tax receipts in 2000.  Voila!  Smaller government, just what we’d asked for!  Surpluses galore!  Yippee!

[But wait, you ask, wasn’t it just waste and pork that the 1990s deficit-busters cut from the national security budget?  Well, the best answer to that comes from a 1983 Hill Street Blues episode, when the narcoleptic comedian-defendant, played by Terry Kiser, respectfully answered a question by the judge thusly: “Dream on, your honor.”] 

My point is this:  Had we kept national security spending at an even-keel 4½% GDP during the ‘90s instead of cutting it to 2.9% GDP, and had we spent it effectively to better handle asymmetric threats, guess what might not have happened in 2001?  Hints: Our economy took a $1 trillion hit because of it; a war started because of it; we’re still running deep deficits because of it.  Bottom line: Preventing that event would have been a good investment, don’t you agree? 

But we didn’t make that national security investment, partly because we were stricken with surplus mania.  We collectively forgot what every private sector entrepreneur and banker knows: borrowing a prudent amount of money for good investments is sound financial practice.  When our kids and grandkids write the history books, I sure hope they can find a way to forgive us for our phenomenal 1990s fiscal blunder, surplus-mania.  What a colossal, tragic mistake that was. 

Fast forward to mid-2000s Porkbusting.  It’s easy to say “cut the fat.”  It’s easy to infer that all pork is fat.  It’s easy to make lists, and to tally the fat dollars.  It’s easy to compose sentences that start with the words “They should”.  It’s more difficult to take a deep breath and think about things just a little harder—but once we do, we see that one possible alternative to “Smaller Government” is “Better Government.” 

Here’s a comparison of two alternatives for changing our spending habits.  Note that the first focuses on the money, the second on what we get for the money. 

When we “cut” the budget (as a % of GDP) without changing the processes, incentives, and controls in budget making and money spending, the guaranteed result will be “less of the same.”  Alternatively, if we effectively reform the government’s processes, measures, controls, and accountabilities, we’ll get better results from the same level of spending.  (And if we can grow the economy faster than deficits cause the debt to grow, our financial health improves—in spite of the deficits—as you already know if you’ve been watching the National Debt Thermometer at this website.) 

Don’t know about you, but I’d rather have more effective intelligence, diplomacy, and military force potential, as well as more equal justice and better infrastructure, for the same level of spending.  In other words, I prefer alternative 2, Better Government.  I’m not nearly as concerned about the money as I am about what we get for the money.

A few voices out there are asking us to think a little harder.  Investor's Business Daily talks of the need for better controls in their "cut the pork" article, for example.  Another voice is the father of management, Peter Drucker, who admonishes us not to be one-dimensional in our analyses:

I insist that in all political and social decisions the economic costs are calculated and taken into account.  To talk only of "benefits" I consider irresponsible and bound to lead to disaster. –Peter Drucker

I wish we had paid more attention to that advice back in the 1990s; it might have caused us to reflect a bit more before accepting an oversimplified case for surpluses.  I wish we’d pay more attention to it today; it might cause us to reflect a bit more before accepting an oversimplified pitch for Porkbusting. 

Again: I'm not against porkbusting per se; I'm against oversimplified, one-dimensional thinking.  As Einstein said:

“Everything should be made as simple as possible, but not simpler.”

Economics is no match for this

Eight weeks ago, a new woman came into my life.  She’s a redhead, I think about her a lot, and I think my wife has been noticing a resultant, subtle change in me.  In any case, thinking about that redhead sure beats the hell out of thinking about economics; I can’t help it.  I’ll still be writing a lot about econ, but I thought I’d show you what breaks my train of thought frequently while I’m writing.  Here she is:

Favorite background music while econ-train-of-thought is being broken:

Fallen, by Lauren Wood.

In case you haven’t picked up on it yet:  I have bragging rights—and I plan to exercise them liberally. 

Xenophobia for sale at US News; any takers out there?

News Flash:  Economic doomsday is just around the corner, according to Roger Simon, Chief Political Correspondent of US News & World Report—unless, of course, we adopt his party-line remedy.  (Guess which party; guess which remedy.)

Me?  Well, whenever a political partisan predicts economic doomsday unless we straighten up and fly right, my mind's eye pictures not doomsday, but a line from Ralph Waldo Emerson:

The louder he talked of his honour, the faster we counted our spoons.   

The article I’m talking about (this time) was published Sept. 20, 2005: "Sacrifice? Don't Count on it" by Roger Simon of US News & World Report.  (Please don't confuse this Roger Simon with novelist/screenwriter/blogger Roger L. Simon, by the way.)  Follow the above link to read Simon's entire article; the image below is an excerpt I assembled, showing seven pseudo-economic assertions that deserve a response. 

Taking them one at a time, here are my responses:

"Who cares" about those large dollar numbers?  That's easy: politicians and political correspondents trying to put a persuasive, negative spin on economic half-truths.  Those folks deal in raw dollar numbers that look really big and scary.  (This article explains how they do it.)

Objective economists, on the other hand, compare deficits and debt to the size of the economy before drawing conclusions or making value judgments.  They know that, on one hand, just a few billion dollars of debt would mean near-bankruptcy for some countries; but they also know that $8 trillion debt is comfortably manageable for any country with a sufficiently large, growing economy.  (The world currently contains at least one such country, by the way.  I live in it.)

Last but not least: Yes, I do indeed remember the late 90s surpluses—but not with nostalgia, because those surpluses were created by dramatically cutting national security's share of federal spending.  (See my article Rethinking the Surplus.)

Interest of $208 billion sounds like a lot, doesn't it?  But what is $208 billion as a percent of our tax receipts?  Answer: nine or ten percent.  How does that compare with the early 1990s?  It was eighteen percent back then.  So: Why are we not celebrating the fact that interest payments today are half the burden they were back then?  (Might it dampen the political spin imparted by the scary-looking number of $208 billion...?)

"Interest on the debt buys us nothing"??  I strongly disagree.  It maintains our creditworthiness with the lenders of the world.  Alexander Hamilton understood the importance of our nation's creditworthiness—why is it such a difficult concept to grasp today?  And if we're in such dire straits financially, why do those lenders only want 5% interest from us? 

And why is it so easy to talk about the interest—but forget all about the "principal" on which we are paying that interest?  Because, guess what we did with the principal: We already used it to help buy aircraft carriers and highways.  The aircraft carrier below, for example, was funded by a mix of 80% equity (tax reciepts) and 20% debt; it's the Nimitz-class carrier commissioned in 2003.  Note its name. 

The USS Ronald Reagan

So much for not getting aircraft carriers.  What about highways?  Well, I was going to mention the Big Dig, but changed my mind at the last minute.  What about environmental protection?  That's proceeding nicely, thank you; reforestation has turned North America into a net carbon-absorbing region of the globe.  (However, just how much of the reforestation of North America is attributable to government spending is up for serious debate.) 

Lastly, what about levees?  Well, it's true we could have had more of them—if only the  Corps of Engineers' Mississippi water control projects hadn't been ridiculed as "pork" and removed from the budget.  Too bad those projects got rejected; seems to me levees would have been a good investment, and we could have funded them as we funded the USS Ronald Reagan: 80% equity, 20% debt.  Unfortunately, that is now water under the bridge, as they say. 

Xenophobia, anyone?  Tell me, what's so scary about the Chinese, and why single them out?  (The chart below explains in detail what I mean.) 

And, excuse me, just how is it that the Chinese are "in control of our economy"?  The author obviously missed this recent report to the Secretary of the Treasury, which said the following:

The presenting Committee member concluded that the large portion of debt held by foreigners does not create a substantial risk for the Treasury. A broader, global investor base should be more stable than a narrow, concentrated, solely domestic one. Moreover, if foreign buying slowed or stopped, there is ample scope for domestic investors to fill the void given broad based observance of portfolio underweighting in fixed income portfolios.

Mr. Simon also obviously missed Alan Reynolds' article explaining what happens when foreign central banks cut back on purchasing US Treasury securities:

Nothing happens – absolutely nothing. 

Thankfully, however, the author did stop short of using the term "Yellow Peril" to describe the alleged future perpetrators of economic doomsday.  (Don’t rule it out just yet, though, because it would fit nicely on a political bumpersticker.) 

We most certainly did not put everything on a "charge card."  We financed everything using the following mix: 80% tax receipts, 20% debt. 

Sacrifice is needed to pay our bills?  This is a false dilemma perpetuated by political rhetoric; false because it ignores another, unmentioned choice.  Why can't we increase tax receipts the old fashioned way: growing the national income, while leaving income tax rates untouched?  If more people are working, more people are paying taxes; and if average incomes also grow, tax receipts grow even if tax rates don't change.  These are irrefutable facts supported unequivocally by the historical record; why are they being ignored?

Bush won't ask for a sacrifice?  True; not until better solutions have been tried, anyway.  And what's wrong with that?

I hope that is a sufficient debunking of the pseudo-economics contained in US News’ politically-motivated editorial.  I’ll conclude with two snippets from my favorite quotes file.

Here's the first one:

Debt that is incurred for capital projects of benefit to citizens and their productivity, or debt that is incurred to avoid inflicting destructive taxes on growing firms—such liabilities can become vital assets of growth and progress. . . Most of the greatest episodes of economic history—from the commercial revolution to the industrial revolution—occurred in the midst of rising prices and rising debts. —George Gilder

Last but not least:

In the old days, when a community had a problem they didn't understand, they threw some more virgins in the volcano. Now, we're much more sophisticated. We throw jobs in the volcano of deficit reduction.  —Dr. Rick Boettger

Still barking up the wrong tree

Our politicians and mainstream media are still braying about federal deficits, debt, and interest on the debt; I see new headlines every day about it.  They are focusing on the money, they are still talking about raw dollars instead of percentages or ratios, they are still implying that any and all federal spending is tantamount to setting the money ablaze, and—as usual—they are predicting doomsday unless we elect (or kick out) so-and-so party or politician.  In other words, they are still barking up the wrong tree. 

Here’s a chart that shows two things: (1) Interest on the debt is still not heading us towards doomsday—and won’t, as long as the economy and tax receipts keep growing; and (2) spending on national security—intelligence, diplomacy, and military force potential—has been a roller coaster ride.  Every time I see this chart it makes me wonder: What if we could have mustered the courage as a nation to keep national security spending on an even keel, and managed it effectively; might we have prevented a war or two?

Click to enlarge.

I'm running out of ways to say this, but I’ll give it another try anyway: 

What's important in the government spending debate is not the money, it's what we get for the money.  If what we get for the money is worth it, we should do it, even if funding it requires borrowing money from willing lenders.  Conversely, if we reject a much-needed project simply because it would require borrowing to help fund it, we are being inexcusably negligent—and guess who will end up paying for that negligence on our part.  (Answer: Our kids and grandkids; some of them with their lives, I’m sorry to say.) 

This hole in the public debate is highly frustrating to me.  In the private sector, the business decision process in a well-managed firm analyzes any major spending proposal as follows:

(1) What benefits would we get for the money: Growth? Cost reduction? Intangible? 
(2) Would the benefits more than offset the costs? 
(3) If not, then reject the proposal; if so, then commit to it, and finance it one of three ways:
    —100% debt; or
    —100% equity; or
    —a prudent mix of debt and equity. (Most firms choose a mix.) 

Steps 1 and 2 are the tough part of the decision process.  After that, step 3 is a no-brainer anticlimax, typically assigned to the financial folks (...no offense to them; I happen to be one myself.)  It’s a well-developed process, and it works.  In the private sector.

Yet, when it comes to government spending debates, our politicians and the mainstream media start at the tail end: step 3, the money.  Steps 1 and 2 get downplayed or completely ignored in the public debate.  Government spending, and the taxing and borrowing to fund that spending, get all the big headlines.  The benefits the spending would generate get near-zero airtime.  The tail is wagging the dog.

Shame on us for continuing to let them get away with it. 

Here's an example I found just today.  It’s an excerpt from an article by Gene Sperling, who was Bill Clinton's economic advisor.  He’s focusing, of course, on the money—imagining a scenario quite different from the way things actually turned out...

Imagine, for example, if [Clinton's] administration had left the new Bush administration with expected annual deficits of $450 billion before we had been hit by war or recession.

In that case, the deficit might have soared to more than $1 trillion -- a destabilizing 10 percent of gross domestic product.

But Sperling’s imagination seems one-sided to me, and I strongly suspect partisan politics as one possible motive.   In any case, I, too, have an imagination, and guess what: I can imagine another scenario, also quite different from the way things actually turned out... 

Imagine, for example, if [Clinton's] administration had left the new Bush administration with a stronger, more effective national security structure.  Imagine the Clinton administration having funded that new, more-effective structure with a prudent amount of borrowing, instead of having sacrificed national security on the false political altar of surplus-worship. 

If that had been the case:
• the twin towers of the WTC might still be standing today;
• the subsequent $1 trillion financial hit might have been avoided;
• the subsequent wars might not have happened; and
• the resultant war- and recession-driven deficits would have been much, much smaller.   

If we had devoted a little less time to surplus-mania in the late ‘90s, and a little more time to the benefits of fulfilling government’s fundamental duty of providing national security, here’s what we might have obtained for the money:

My point, again, is this: What we get for the money is the important question, and it should be the first question.  If the benefits surpass the costs, we should do it—even if borrowing would be necessary.  It takes courageous leadership to sell the ideas that are right for the long term but difficult to measure in the short term. 

And remember: benefits are not always financial.  For example, war prevention is a benefit of national security, but how many dollars is a prevented war worth?  Don't ask me, I don't know how to place a dollar value on vast numbers of lives.  But do you remember the Reagan-years defense buildup?  Yeah, that's right: the one that "busted the budget" and "ran up all that debt"?  Well, here's what we got for the money—and what I do know is this: It was worth every penny.

When a spending proposal’s benefits surpass its costs, it is a good investment.  And borrowing money to finance good investments is sound financial practice.  Ask any banker. 

Saving big money on gasoline

Every time I fill up, I’m buying another 300 miles of transportation.  Today, I pay 13¢ per mile for the fuel that carries me that distance.  But I’d be willing to pay 22¢ per mile for fuel, or more—using a vehicle of similar size, performance, reliability, and initial cost compared to the one I drive today—if that’s what it took on my part to achieve and sustain independence from oil. 

For those of you who keep track of fuel prices on a per-gallon-of-gasoline basis, I’ll convert it: Today, I pay $3.00 per-gallon-of-gasoline.  Each gallon gives me 23 miles worth of transportation; a full tank costs roughly $40 and gives me a total of 300 miles.  That comes out to 13¢ per mile. 

But I’d rather not have to buy gasoline to get my 300 miles of transportation.  I’d rather buy, for example, hydrogen.  I’d jump at the chance to pay a mere 13¢ per mile for it, and I’d do it with a smile for 22¢ a mile; in other words,  I’d be willing to pay $66 for 300 miles of not-oil-based transportation.  In that case gasoline would cost me absolutely nothing, and I'd be extremely happy about that. 

How much extra would you be willing to pay for transportation in return for oil independence?  I know some people who not only would not be willing to pay more, they want cheaper gasoline more than they want oil independence . . . so, they support things that knock a few cents off the price of a barrel of oil, such as drilling in the Arctic National Wildlife Refuge, etc.  That’s okay; diversity of opinion is what free markets and a free society are all about.  The Wisdom of Crowds will work out the solution eventually. 

For me, hydrogen technology looks like it has the lead in the race to solve the oil problem.  Will it win that race?  The market (you, me, and several million others) will eventually decide that as we continue casting votes with our dollars.  But I’m keeping an eye on the race, especially the developments in hydrogen technology.  Currently, the main problem with the much-hyped hydrogen fuel cell solution is: How do you store 300 miles worth of hydrogen in a vehicle of similar size and performance to the one I drive today?  They don’t quite know how yet, but as soon as that problem is solved on a large scale basis, affordable-cents-per-mile hydrogen transportation will be just around the corner.  And if some other not-oil technology wins the race, so much the better.  In any case, I’m keeping an eye on developments. 

A lot of geniuses in a lot of laboratories around the world are working on the problems, including several at my alma mater, Purdue.  (Next step will be to hook the winning technologies up with sufficiently-funded entrepreneurs; after that it’s goodbye OPEC.)  Below are links to a few relevant articles you might find as interesting as I did. 

• OPEC feels threatened.
• Summary of the hydrogen storage problem (Scientific American).
• Purdue: Just fill ‘er up with water (and organosilane).
• Canada and Germany: graphite.
• Denmark: ammonia.
• NIST: titanium atoms.
• Akron: solid hydrogen fuel.
• Intelligent hybrids in the meantime?
• Why we need to increase the gasoline tax.

Will these developments lead to "goodbye OPEC" in my lifetime?  I hope so, but we'd better hurry up.

Not a turning point yet

Long term interest rates have resumed their descent, and are back on a collision course with rising short term rates.  (Three weeks ago I thought we might have been looking at a turning point.  Anyone who's been wondering why I'm not in the interest rate forecasting business should no longer have any doubts why I'm not.) 

Click to enlarge.

Pork Schmork: It’s a Good Investment

Do you think deficit spending that successfully prevents an overthrow of the US government, or a thermonuclear war, or the destruction of an entire city, is “fiscally irresponsible”, or perhaps “pork”?  Or do you think it’s a “good investment”? 

Quite a while back, I decided that destruction-prevention was a good investment.  But destruction-prevention is a double negative that is one heck of a tough idea to communicate, I’ve discovered.  Nonetheless, I plan to continue hammering away at it, because it’s time we stopped ignoring the double negative.  Ignoring it has been costing lives, property, and money for too long.  Our definition of the word “investment” is long overdue for a mini-overhaul. 

Here’s the current, insufficient definition of the word “investment”:

Investment is the purchase of goods that are not consumed today but are used in the future to create wealth.

That definition is inadequate because it doesn’t cover a lot of government expenditures that are true investments in a better future, instead of “pork” (i.e., wasteful consumption).  Levee-strengthening is the first example that comes to mind. 

So here’s a new, improved definition of the word “investment”:

Investment is the purchase of goods that are not consumed today but are used in the future, either to: (a) create new wealth; or (b) prevent the destruction of existing wealth. 

[The proper definition of “wealth” is in the end note at the bottom of this article.  Hint: money isn’t wealth.]

What’s a good investment?
Under the new, improved definition, a good investment is an expenditure that successfully creates new wealth or prevents destruction of existing wealth. 

Note that, under this definition, national security becomes an investment: even though it doesn’t create wealth, it does prevent the destruction of existing wealth.  [By “national security” investment I mean spending on intelligence, diplomacy, and military force potential, by the way.] 

The double-negative, destruction prevention, opens up a whole new dimension to ponder before we decide to accept various spending options as “investments” instead of ridiculing them as “pork,” doesn’t it?  I’m sure you can think of many personal decisions that serve as examples, and so can I. 

But government spending decisions are usually the first to come to my mind.  Below are just a few examples of good investment decisions, and my opinion as to their wealth-creation or their destruction-prevention benefits (...warning: your opinion may vary strongly from mine):

•  The Louisiana Purchase (...doubled our nation’s size; one of the top 3 investment decisions ever made by a president; an investment in wealth creation)
•  The New Deal (...bolstered popular confidence in US leadership, prevented overthrow of US government; one of the top 3 investment decisions ever made by a president; an investment in destruction prevention)
•  Reagan-years defense buildup (...prevented thermonuclear war, ended Cold War, bolstered popular confidence in US leadership; one of the top 3 investment decisions ever made by a president; an investment in destruction prevention)
•  The Marshall Plan (...created viable economies, prevented political collapse in Western Europe; an investment in both wealth creation and destruction prevention)
•  DARPA seed money for the prototype internet (...created platform enabling me to tell you this; an investment in wealth creation)
•  Weather satellites (...saved lives and property; an investment in destruction prevention)
•  The highway bill (...improves transportation infrastructure; an investment in wealth creation)

Next are just a few examples of rejected projects that would have been good spending decisions—in my opinion and for the same reasons—if we had only debated them as “investments” with costs and benefits, instead of allowing them to be dismissed as “budget busters” or “pork” or "fiscal irresponsibility":

•  Lake Pontchartrain levee enhancement, to prevent the storm-surge destruction of New Orleans in the event of a hurricane direct hit or near miss
•  Superconducting supercollider, to enhance fundamental physics knowledge, and perhaps accelerate the advent of oil-independence day
•  Beefed-up mid-90s embassy security in Kenya and Tanzania, to prevent their destruction by terrorist bombs
•  Even-keel 1990s national security spending of 4-4½% GDP (instead of cutting it to pay for the politically-popular late-90s budget surplus—popular on both sides of the aisle, I might add), to perhaps avert or preempt the 9-11 attacks.

Think about it.  Should we have made those investments?  Or were they wise rejections of wasteful “pork” or “fiscal irresponsibility”? 

I am a big fan of Adam Smith—but I have also noticed that many of us, in our fervor to advocate free markets and limited government, seem to have forgotten Adam Smith’s enumeration of the five basic duties of government in a free-market society:

1. Defense (...protection from external wealth destroyers);
2. Justice (...protection from internal wealth destroyers and growth-stiflers);
3. Education (...creation of future wealth-creators and wealth-protectors);
4. Infrastructure (...provision of wealth-creating assets unaffordable by the private sector); and
5. Stable currency (...solid foundation for borrowers and lenders to create wealth). 

When the government is effective at providing those, it has created a safe, level playing field for private, free-market competition to work its wonders.  Too bad Smith died two hundred years too soon to explain to us that effective government spending to accomplish any of those five duties is not “pork”; it’s a good investment in our nation’s future. 

And it’s also too bad that Alexander Hamilton died too soon to remind all of us that borrowing money for good investments is perfectly sound financial practice.  Let’s think about that the next time one of our politicians uses the word “pork” or the label “fiscal irresponsibility” to describe spending projects that would (...horror of horrors...) increase the deficit. 

And finally, let’s keep our eye on the debt-to-GDP ratio.  If its medium to long run trend is flat or decreasing while the economy is growing, we are making good investments in the aggregate. 

------------------------------------------
End note:  Wealth isn’t money, money isn’t wealth
What is “wealth”?  It is any of the things that create happiness, some of which are intangibles: Life, health, knowledge, friends, family, services, machines, land, comfort, safety, culture, liberty, benevolence, entertainment.  But not money.  Money I’ve earned isn’t wealth; it’s just the stuff that buys some of the things on the wealth list.  It’s just a time-shift mechanism between wealth I’ve produced versus wealth I can now afford to buy.  Money provides the ability to acquire some, but not all, of the things that are true “wealth.”  (In a hard rain, I’d rather have a fifty-dollar umbrella than a fifty dollar bill.  In a dark alley at night, I’d rather have a ten-dollar flashlight than a ten dollar bill.  In a freezing blizzard, I’d rather have a hundred-dollar coat than a hundred dollar bill.  Reason: Money isn’t wealth.)