Conservatives against thrift

Yeah, but what if it takes *lower* taxes to pay off the debt?

I think it's safe to say that both Democrats in Congress (70's, 80's) and Republicans in Congress (2002-06) are guilty of fiscal excesses.

An American uncle of mine (now deceased; lived in southern California) used to talk about the fact that Americans were less inclined to save their money than Canadians and Europeans. At the time, the US savings rate was still above zero, so he saw this as a generally good thing - it was an impetus to greater economic growth, and led to other positive things, like better and more plentiful jobs, lower unemployment, and more upward mobility for those willing to take advantage of opportunities. I suspect that many economic/pro-growth conservatives felt the same way, and hooked on to the idea that maximum spending and consumption was "good for the economy".

Trouble is, we've just raised a generation that has no memory of pecuniary caution - how many people under 30 or 40 were ever taught to save 5% or 10% of their income? How many of these saw their parents save 5% or 10% of their income? For the millions of North Americans who were raised in material poverty in the 1960s, the relative improvement and increased affluence of the present day is measured in consumer goods. For all but a small minority, it sure isn't measured in one's financial stability or the moral well-being that goes with responsible spending and a habit of saving.

Today we see what happens when this is taken too far: we buy as much house as we can, or we refinance our present house as much as we can - hey, why not a loan-to-value ratio of 125%? - and then we spend that money, by golly, because it makes us feel good and it helps the economy and it keeps things moving and holds down unemployment and ... uh, hey, honey, what's this about our interest rate and mortgage payment going up next month? Did you know about this? How are we going to afford this? I don't remember the guy at the bank talking about this...

The bubble, overinflated and unstable, pops. As goes a family, so goes a government budget. Conservatives darn well should have known better, and in fact did know better, but participated in this moral slide anyway in the name of "freedom" and "growth".

Some thoughts by this non-economist:

1. WRT savings & consumption: My understanding is that a healthy economy requires both. If nothing else, one needs savings to provide the capital for financing various job-creating ventures (e.g., new factories, venture capital for startups, capital spending on new equipment); but one also needs consumption to absorb the various goods & services produced by, um, producers.

As we're currently seeing, inadequate savings has obvious negative consequences (which are, if anything, currently mitigated only by a continued influx of foreign capital). But inadequate consumption (i.e., the flip side of excessive savings) can lead to overcapacity among producers, which in turn leads to losses, job cutbacks, & ultimately bankruptcy.

Unless one turns to export markets as an outlet for the excess (as Asian countries have been doing for quite some time), but that has its own problems (e.g., what happens if various markets for your imports experience downturns, or go protectionist, or require massive capital imports to keep consuming your goods).

2. WRT government deficits...In general I dislike these, but there are exceptions. One key question: does the likely return on investment (however defined) exceed the cost of borrowing (i.e., interest payments)? A war that serves US national interests probably produces a positive ROI (albeit mostly in non-economic terms). Ditto spending on infrastructure (e.g., roads, rail, and/or airports, depending on one's preference for trains vs. planes & mass transit vs. cars).

Another consideration: is the need for government borrowing temporary or permanent? If the former, then perhaps it's fine (in a pinch); if the latter, then one should probably think about raising taxes or cutting spending.

A consumption tax need not be regressive. Although savings rates tend to increase with income, all this means is that taxing all consumption _at the same rate_ - e.g., as with the FairTax - would be regressive. So use a graduated rate schedule. AFAIK, this couldn't be done with a retail sales tax or VAT (counterexamples welcome); but it can be done through our current income-tax structure: E.g., Just take a tax-deferred account like a (traditional) IRA or 401k, and remove both the penalties & limitations on early withdrawals as well as the contribution limits. Then make all contributions to such an account deductible, and count all withdrawals from such an account as taxable income. Then tax that according to a graduated rate schedule. That should capture a goodly portion of consumption.

(I realize that this system wouldn't tax that portion of "consumption" financed via borrowing. Although consistency would imply treating such borrowing as taxable income as well, this seems both politically impossible and utterly impractical. I'd settle for eliminating interest deductions of all kinds.)

MI, you are suggesting we report our spending to the IRS rather than our income?

No, just contributions to, and withdrawals from, savings accounts specifically designated tax-deferred. AFAIK, such reporting is already done with IRAs & 401k accounts.

As for the system you suggest...I'm not sure how practical it would be. Unless we ban cash transactions, I could see this sort of sales tax generating massive compliance problems, even with technological transaction captures. The FairTax quoted a 30% rate for a tax base similar to the one you suggest. How many people would pay cash in exchange for a de facto 15% price knockoff? Issues of distributional justice aside, I'd like to see some mid-size state successfully implement this sort of system before endorsing it.

Note that my current support for some sort of consumption tax is prudential. It's not 'cuz I think a consumption tax is the ideal method for raising government revenue. Rather, it strikes me as an appropriate response to overconsumption on the one hand, and an abysmal savings rate on the other. If our net savings rate was more comparable to China's, I'd probably think differently. As I mentioned above, a healthy economy requires both savings and consumption.

Pyrrho - I agree that massive capital injections (from Asia or elsewhere) can tend to throw the savings/consumption balance out of whack. My 10:42 post - intended as a corrective to the "consumption bad, savings good" mentality that earlier posts seemed to hint at - neglected these considerations for simplicity's sake.

I agree that a reckoning is coming; my only hope is that it occurs gradually, so that everyone has time to adjust.