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"Fat, drunk, and stupid is no way to go through life, son," says Dean Vernon Wormer on his way to expelling the members of the Animal House fraternity. When learning of his expulsion, John Belushi's character Bluto remarks, "Seven years of college down the drain!"

The first argument against the U.S. economy suggests that an economic path that is the equivalent of fat, drunk, and stupid cannot have a good ending. The three "pillars" of the U.S. economy are: (1) government deficit spending, (2) the Federal Reserve's easy money policy, and (3) profligate spending by U.S. consumers.

When the federal government runs a budget deficit, it sells U.S. Treasury bonds to make up the slack. From the beginning of the 1960s up until the late 1990s, the U.S government generally spent more than it collected in taxes so the supply of bonds grew. By the late 1990s, however, the government was actually running a budget surplus and using the extra cash to buy back lots of its bonds. During the technology bubble, the government was raking in lots of taxes (often paid on stock market gains).

Surprisingly, some economists thought that the U.S. debt was becoming too small! They feared that persistent U.S. government budget surpluses would lead to paying off the entire national debt and make U.S. Treasury bonds extinct. This could cause problems because some investors buy U.S. Treasury bonds as key parts of their financial strategy (e.g., insurance companies). As we see in Figure 4.1, the fear of government surpluses leading to a debt shortage was unfounded.

In an amazingly short time, the fear of government surpluses evaporated and we have returned to the good old days of deficit spending. In just four years, the budget swung from a surplus of more than $200 billion to a projected deficit in excess of $500 billion.

After the stock market bubble popped, the Federal Reserve cut interest rates dramatically to soften the economic pain. The popular press believes that monetary policy can come to our rescue. Alan Greenspan is often called the second most powerful person in the United States. Every statement by the Federal Reserve is scrutinized for the slightest nuance of monetary policy.

Every month the government reports on American consumer spending. Wall Street cheers every report showing that we are continuing to spend like 1920s bootleggers and boos any hint of frugality. The assumption is that the more the U.S. consumer spends, the better for the U.S. economy.

Can a country really become rich by spending more than it earns and by printing money?

No. Government deficits promote waste. Loose money creates inflation, not wealth. Finally, it is possible for consumers to spend too little (e.g., Japan), but the U.S. personal savings rate is close to zero. If profligacy and printing presses were the way to grow an economy, then many countries that are now bankrupt would be economic superpowers. Similarly, seven years of fat, drunk, and stupid would be a good start to college.