In my lifetime, the price of a first-class postage stamp

Began at           .03
Then increased to  .05  on  Jan. 7, 1963
Then increased to  .06  on  Jan. 7, 1968
Then increased to  .08  on  May 16, 1971
Then increased to  .10  on  March 2, 1974
Then increased to  .13  on  Dec. 31,1975
Then increased to  .15  on  May 29, 1978
Then increased to  .18  on  March 22, 1981
Then increased to  .20  on  Nov. 1, 1981
Then increased to  .22  on  Feb. 17, 1985
Then increased to  .25  on  April 3, 1988
Then increased to  .29  on  Feb. 3, 1991
Then increased to  .32  on  Jan. 1, 1995
Then increased to  .33  on  Jan. 10, 1999
Then increased to  .34  on  Jan. 7, 2001
Then increased to  .37  on  June 30, 2002 

The price will increase to 39 cents in 2006.

Are we getting our money’s worth? Of course not. The U.S. Postal Service (formerly known as the U.S. Post Office) enjoys a legal monopoly on the delivery of letters, bills, catalogs, and junk mail to your mailbox. Well, its not your mailbox, even though you bought it. It’s there for the exclusive use of USPS, and its use by any other party invites a stiff penalty.

The best evidence that we don’t get our money’s worth from the post office is the flight to online banking, online billpaying, online shopping, and the rise of UPS, FedEx, and similar carriers. USPS boasts of an operating surplus in 2004, but that surplus is down from the one recorded in 2003, and it is probably due to the continuing contraction of USPS employment. USPS is in a death spiral, and its management knows it.

In recognition of that, USPS contrived a partnership with FedEx. Perhaps, in the long run, that partnership will evolve into the absorption of USPS by FedEx. That would be a good thing, except that it might enable FedEx to acquire a taxpayer-funded asset cheaply — or even for nothing.

The best solution would be to dissolve USPS and auction its assets. The proceeds should be spread among taxpayers in the form of a tax credit proportional to each taxpayer’s income tax liability for the year in which the proceeds are realized.

I, for one (among many), would not miss the surly presence of a USPS carrier or clerk in my life. It is pleasant to do business with UPS and FedEx drivers and other employees. They may be pleasant only because they make good money and want to keep it that way, but that doesn’t matter. They are pleasant and they do deliver the goods, literally and figuratively.

I took aim at a particular application of game theory in “Schelling and Segregation.” Dave Patterson (Order from Chaos), offers a general critque of game theory. Here’s a sample:

[G]ame theory has one major flaw inherent in it: The arbitrary assignment of expected outcomes and the assumption that the values of both parties are equally reflected in these external outcomes. By this I mean a matrix is filled out by an individual (we’ll call them the conductor), it is up to that conductor’s discretion to assign outcome values to that grid. This means that there is an inherent bias towards the expected outcomes of conductor.

Or: Garbage in, garbage out.

From Arnold Kling:

[I]n the case of economics, the academy has been more or less hijacked by mathematicians who want economics to masquerade as engineering.

Mathematical economics overlays a false precision on an unconcern for flesh-and-blood reality.

Note that the title of this post doesn’t say “only deficit spending is inherently inflationary,” which is the prevalent conception among laypersons, commentators, and even many economists. In the interest of keeping the preceding post from being any longer that it is, I glossed over the relationship between government spending, deficits, and inflation. This post fills the gap.

That government spending is inherently inflationary can be shown by the following first-order approximation of its effects, in the case where government spending is “financed” by taxes:

• Suppose the GDP of the United States would be, as it is today, about $12 trillion in the absence of all government. (Actually, as I show here, GDP would be a lot more than today’s $12 trillion in the absence of government — defense and justice, excepted — but I’m giving government some benefit of the doubt in this example.)

• Suppose government arrives on the scene one fine day and says: “You Americans need our services, so we’re going to tax you $2 trillion in order to provide things that we want you to have.” A few of those things — such as defense and justice — will be worth something to almost everyone. Some of those things will be valued only by persons who want someone else to pay for them. Most of those things will be heavily regulatory and thus will detract from GDP. To assume, as I do in this example, that the $2 trillion is effectively thrown away is to be generous to government.

• Government’s edict has the same effect as if the producers of $2 trillion worth of valuable goods and services walk off the job. (More accurately, it’s as if they walk off the job and begin to vandalize homes and businesses.) Only, in this case, government entices them off the job with $2 trillion in “tax dollars.” But the the taxes are an illusion.

• When the producers of $2 trillion worth of real output walk off the job, at the behest of government, it is as if government were destroying real output. But government pretends that it’s producing $2 trillion worth of real output, so (1) it levies taxes for government services, most of which taxes fall on the productive sector, and (2) it pays producers of government services from those taxes.

• But the producers of real output know what’s happening, so they raise prices by enough to compensate for the taxes they’re paying. And government collects those “empty dollars” in the form of taxes. Why are those tax dollars “empty”? Because they don’t represent real output, government having destroyed the same by enticing producers out of the real economy.

• In sum, government pays the producers of government services in “empty dollars,” which those producers then try to spend on real output.And so we have $12 trillion chasing $10 trillion worth of real goods and services.

That’s real inflation. No deficit spending necessary. And it happens every time government finds a way to widen the gap between what the productive sector could produce and what it actually produces, after government has worked its will.

What if government were to borrow the $2 trillion instead of raising taxes by $2 trillion? Borrowing doesn’t change the outcome, just the way we get there. It’s still as if the producers of $2 trillion worth of valuable goods and services walk off the job. Only, in this case, government entices them off the job with $2 trillion that it calls “borrowing” instead of “taxes.” Again, if the producers of $2 trillion simply walk off the job, that leaves a real GDP worth $10 trillion. This time, however, the producers of that output don’t raise prices to compensate for taxes; they raise prices to capture the $2 trillion that government puts in the hands of producers of government services. The result is as before.

Here’s another way to look at it: Taxation results in supply-side inflation, as producers of real output raise prices to compensate for taxes; borrowing results in demand-side inflation, as producers of real output raise prices as government injects new money into the system.

What about the “crowding out” effect of government borrowing on private, growth-inducing investment? Here’s the real story:

• When government enters financial markets for additional funds, that raises the demand for money. The usual result would be higher interest rates, which would tend to dampen private investment and consumption to some degree.

• However, when government borrows instead of raising taxes it leaves nominal dollars in the hands of the private sector. Some of those dollars flow into financial markets, thus increasing the supply of money.

The precise net effect depends on the marginal propensity to save, and on the elasticity of investment and consumption with respect to interest rates. But it seems likely that the net effect of government borrowing is close to zero. As I wrote here:

The actual effect of government borrowing on interest rates — and thus on the cost of private capital formation — is minuscule, and perhaps nonexistent, as Brian S. Westbury explains:

The theory [that deficits drive up interest rates] suggests that deficits “crowd out” private investment, putting upward pressure on interest rates. In other words, government borrowing eats up the available pool of capital. But today’s forecasted deficits of $300 to $500 billion are just a small drop in the pool of global capital markets. In the U.S. alone, capital markets are $30 trillion dollars deep, for the world as a whole they approach $100 trillion. Deficits of the size projected in the years ahead cannot possibly have the impact on interest rates that many fear….

The next time someone tells your that taxes should be raised in order to be “fiscally responsible” and to stem the tide of inflation, tell him this: Government spending is inherently irresponsible because it reduces real output. And government spending is inherently inflationary, not matter how it’s financed.

Recently I had a long and unproductive exchange with a blogger, an evident “gold bug,” who insisted on making a big deal of these factoids:

Dallas Morning News columnist Scott Burns wrote June 1 that the government’s debt is actually “a mind-numbing $43 trillion. . . .”

Burns said the Federal Reserve has put the net worth of all U.S. households at just $40.6 trillion. . . .

Dr. Kent Smetters [an economist on a Treasury Department project], testified before a subcommittee of the House Judiciary Committee, Burns wrote.

Smetters told the subcommittee: “The government reports that the national debt in 2003 was about $3.6 trillion in the form of government ‘debt held by the public.’ But that number ignores massive imbalances in Medicare and Social Security programs and the government’s other programs.

“When the liabilities associated with those programs are taken into account, the nation’s fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents,” he told the subcommittee. . . .

The hysterical blogger thereupon concluded that “we” are bankrupt because “our” debt outstrips “our” net worth. As I tried to explain to the hysterical blogger, the $43 trillion is not debt “we” (householders) owe today, it’s an estimate of the present (discounted) value of future, unfunded obligations of the U.S government. Only about 1/6 of that amount is now on the government’s books (the current, gross federal debt). The rest won’t become a legal obligation unless and until the government is required to borrow money because future outlays exceed future revenues.

Let me elaborate: $43 trillion is an estimate of the present (discounted) value of debt the U.S. government might eventually owe, given certain projections about revenues and spending (including spending on entitlement programs such as Social Security, Medicare, and Medicaid). Those projections might prove to be wrong, either because of (1) cuts from projected entitlement benefits (which wouldn’t mean cuts in actual benefits, as benefits are scheduled to become more generous), (2) increases in the taxes that partially underwrite those benefits, or (3) some combination of the two. The same is true for government’s general accounts (the ones that fund actual government operations as opposed to transfer payments), which also are subject to future changes in spending and taxes.

But let’s assume that all of the projections will come to pass, so that the discounted value of future government spending less future taxes is in fact $43 trillion. Does that somehow mean we are bankrupt or on the verge of bankruptcy? No it does not. Consider this example: Mr. & Mrs. X apply for a mortgage loan. Based on their current family income of $100,000, the lender gives them a $250,000 loan to buy a house. Now, I know that the loan becomes a real, current obligation (unlike the $43 trillion), but bear with me. The loan doesn’t bankrupt Mr. & Mrs. X; otherwise, the bank wouldn’t give them the loan. The loan doesn’t bankrupt Mr. & Mrs. X because the lender is pretty certain, based on the couple’s employment history and prospects, that the couple is going to keep making $100,000 a year, and more.

How does that relate to the $43 trillion? The $43 trillion includes today’s federal debt (which already is being serviced) plus a stream of projected future deficits of, let’s say, $1 trillion a year. Now, I don’t like that extra $1 trillion a year any more than anyone else (except liberals, to whom I’ll come). My reason for not liking it is this: It is part (and only a small part) of a massive redistribution of resources by government; taking from those who are productive and either pouring the resources down ratholes or giving the resources to people who haven’t earned them. Regardless of that, Americans can “afford” the extra $1 trillion a year because they’re now making about $12 trillion a year (GDP), less federal, state, and local taxes (excluding transfer payments) of $2+ trillion a year. So, like Mr. & Mrs. X, we taxpayers can afford the annual “mortgage” payment (the additional $1 trillion a year) from future income (GDP), so we’re a good credit risk. Or, rather, the U.S. government is a good credit risk because it can always tap into our pockets by raising taxes.

That brings me to the question whether the U.S. government’s debt can continue to grow, and at what rate. I addressed that question at length in an earlier post on “debt hysteria”; for example:

Because individuals and institutions are quite willing to lend money to the federal government, it can keep piling up debt indefinitely. In fact the federal government has been able to increase its debt almost continuously since opening for business. From January 1, 1791, to April, 19, 2004, the federal debt rose at an average annual rate of 5.5%. During that period, the debt reached a low of $33,733.05 on January 1, 1835. From then until April 19, 2004, the debt rose at an average annual rate of 11.3%. That’s a much greater rate of increase than we’ve experienced recently or expect to experience in the next several years.

What about those future generations? Well, future generations not only “inherit” the debt, they also inherit an offsetting asset. If you lend the government $10,000 by buying a 10-year Treasury note, and you keep rolling the note over (that is, buying a new 10-year note when the old one matures), the note eventually will pass to your heirs.

Future generations of taxpayers also inherit an obligation to pay interest on the federal debt. But those same future generations receive the interest that is being paid.

What about debt service? It comes down to the same thing. One person’s interest payment is another person’s income. The interest rate on the government’s debt does fluctuate, but that’s due less to the size of the debt than to conditions in credit markets. U.S government debt, as large as it is, is a small component of global capital markets — currently less than 10 percent. (There’s a relevant chart about interest on the debt in this post by The Skeptical Optimist.)

What about those “foreigners” who hold U.S. government debt? There is the notion that, by holding our debt, foreigners have a “hold” over us. How so? It hurts them if U.S. debt loses value. Foreigners have absolutely no incentive to “dump” U.S. debt unless financial markets already have signaled that it’s losing value, or unless they get wind of a sudden, unanticipated change in America’s economic picture. The $43 trillion isn’t such a change; it’s long been anticipated by financial markets. In any event, given the liquidity of U.S. government securities, there is scant room for speculative attacks on those securities. If any large investor were “dumping” U.S. debt, in the absence of new information, that would be the investor’s loss because the investor would be driving down the value of its own holdings. The value of those holdings would return to something like their former levels once the investor had finished its “dumping,” thus rewarding the buyers with windfall profits.

Variations in the price of U.S. government debt depend mainly on inflationary expectations for the U.S. vis-a-vis other countries. Inflationary expectations and trade deficits also influence exchange rates, and exchange rates play back into the price of debt. We’ve been through periods of high inflation, high interest rates, large trade deficits, and low exchange rates at varying times, and we’ll go through them again. Today we have relatively low (but rising) inflation, and relatively low (but rising) interest rates, a persistently large trade deficit (willingly financed by foreigners), and therefore a falling exchange rate. But all of that can and will change as higher interest rates and lower exchange rates work their way through the economy, dampening investment and consumption spending and, therefore, imports.

Today is not forever. Doomsaying is an ancient and long-discredited profession. Remember the ten years between the “oil shocks” of the early 1970s and the end of double-digit inflation in the early 1980s? Remember the next 20 years of almost unmitigated economic growth with low inflation? Extrapolating from current economic conditions is a sucker’s game, unless you bet on the underlying trend in the U.S., which is long-term economic growth.

Yes, we could go through a prolonged period of higher inflation and higher interest rates, but that doesn’t mean the U.S. government won’t be able to fund its debt. Someone always steps up to buy U.S. government debt, because it’s so secure. And given the underlying strength of America’s economy, which is the source of the U.S. government’s good credit, someone always will buy U.S. government debt.

And now we come to the real problem: government spending. Whether government spending is financed by debt or taxes, it is a generally destructive force. Government spending (with some exceptions for defense and justice) results in the gross misuse of resources. And the ways in which Americans are taxed to fund government spending (which is still how most of it is funded) tends to penalize, and thus discourage, growth-inducing initiatives.

Let me say it again: The real problem isn’t government debt, it’s government spending. Government debt is the effect, not the cause; the symptom, not the disease. Our “leaders” in Washington obviously don’t want to do anything to fight the disease; they’re like terminal alcoholics who keep ordering triple shots.

It’s up to libertarians and legitimate conservatives to make some real noise about government spending. Focusing on debt plays into liberals’ hands because they’ve come around to “fiscal responsibility” — their kind of fiscal responsibility: higher taxes to support higher spending.

The Marxist take on New Orleans is here (h/t Marginal Revolution):

How the Free Market Killed New Orleans

By Michael Parenti

The free market played a crucial role in the destruction of New Orleans and the death of thousands of its residents. Forewarned that a momentous (force 5) hurricane was going to hit that city and surrounding areas, what did officials do? They played the free market.

They announced that everyone should evacuate. Everyone was expected to devise their own way out of the disaster area by private means, just like people do when disaster hits free-market Third World countries.

It is a beautiful thing this free market in which every individual pursues his or her own personal interests and thereby effects an optimal outcome for the entire society. Thus does the invisible hand work its wonders in mysterious ways.

In New Orleans there would be none of the collectivistic regimented evacuation as occurred in Cuba. When an especially powerful hurricane hit that island in 2004, the Castro government, abetted by neighborhood citizen committees and local Communist party cadres, evacuated 1.5 million people, more than 10 percent of the country’s population. The Cubans lost 20,000 homes to that hurricane—but not a single life was lost, a heartening feat that went largely unmentioned in the U.S. press.

And blah, blah, blah, blah.

Actually, the disaster in New Orleans was set up by government, as I explain here. And the failure to evacuate people was surely a government failure. Remember all those school buses and other municipal vehicles that went unused by the unesteemed mayor of NO? What happened in NO was by no means a test of free markets; it was proof that government isn’t the answer.

Moreover, total preparedness for every conceivable disaster is a prescription for impoverishment. But that thought would never cross the mind of a Marxist apologist for Castro’s regime. Cubans have little say in how they live their lives. Sometimes (rarely) that works to the advantage of Cubans; most of the time it works to their detriment. But that concept — namely, opportunity cost — is too subtle for your average Marxist propagandist to comprehend.

Evidently, in l’affaire Katrina, the central government’s “failure” to usurp the responsibilities of individuals, businesses, and local and state governments will lead to something like this:

• Congress will invoke the Commerce Clause to make such usurpation constitutional.

• No president will dare veto such a “popular” mandate.

• The Supreme Court, with its “Living Constitution” majority intact, will endorse the central government’s usurpation of responsibilities that lie elsewhere.

• Congress will appropriate vast sums of money to ensure that no disaster goes unanticipated or is not reacted to instantly.

After all, how else can we possibly be certain that Mother Nature will never again claim as a victim an American or a visitor to the United States (legal or illegal)?

And when the central government is through earthquake-proofing, fire-proofing, and flood-proofing every structure in the United States it will start accident-proofing every vehicle and baby-proofing every bit of furniture and clothing. It would then go on to illness-and-death-proofing every person — perhaps retroactively — but by then it would have long since driven the economy into the ground. And so, as usual, the poor will be left to fend for themselves (as if everyone else doesn’t have to do so). But all will be poor, and the Left will — at last — be happy. A perfect world in which all are equal, and equally miserable.