From: kwee@oracle.uucp (Karl Wee)
Newsgroups: talk.politics.misc,talk.politics.theory,alt.rush-limbaugh
Subject: Re: Who is economically illiterate? (was: National debt is not bad (only if you are economically illiterate)
Keywords: Economic illiteracy, UGA Economics, T-1440 daze of horror
Date: 23 Jan 93 10:00:15 GMT
Organization: Oracle Corporation, Redwood Shores CA
X-Disclaimer: This message was written by an unauthenticated user
              at Oracle Corporation.  The opinions expressed are those
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In article <1993Jan22.174856.9216@galileo.cc.rochester.edu> doli@troi.cc.rochester.edu (David Oliver) writes:
>
>In economics there are really two schools of thought on the first point.  The
>majority view is that government spending DOES crowd out private investment,
>which in of itself might not be a bad thing if the alternatives are worse,
>taxing instead of borrowing or reduced spending.

What about the alternative that govt spends less?

>The minority view is that
>individuals increase their saving by EXACTLY the amount that the government
>wants to borrow.  Why?  Because people realize that they will eventual have
>to pay back the debt through taxes. The interest rate doesn't change and
>therefore the amount of private borrowing doesn't diminish.

Not when people realize that the govt will HAVE TO resort to some inflation
in the future to manage its huge debt.  Then the cycle of panic can drive
things out of control.

>Actually, most
>economists agree that some increased savings occur, but unless it is exactly
>the right amount there will be some crowding out.  There is some emperical
>evidence as to the latter being true, but obviously not enough to convince most
>economists.  My opinion is that the second is closer to being true that the 
>first, with real interest rates being close to zero I find it hard to believe
>that there is any significant crowding out going on.  But I don't hold this 
>belief religiously (like many at this school).  For reference purposes the
>latter view is called "Ricardian Equivalence".

Even if the increased savings is the exact right amount, you still have a
lot of private spending transformed into public spending, a distortion of
the market.  Any such distortion makes things harder to analize and improve.
So without even going into the details of how spending is done, private
spending comes out ahead.

>As for the second point I find this to be a strawman.  National income is
>just private consumption, investment, government consumption, and net exports.
>If the government has to use it's money for interest payments instead of
>something else then we are just moving money from one column to the other.  If
>as is the case, some debt is held by foreigners then it must be spent or
>invested back in the U.S. economy because the debt is denominated in U.S.
>dollars. Anyway, not much debt is in foreign hands.  As for mortgaging our 
>future for our present, this argument may be an argument for prudence, but
>there is no economic reason to believe that there are ill-effects to 
>transferring payments to the future.  Especially if deficit spending leads
>to higher growth and therefore makes jus wealthier in the future than we
>would've been.  After all, this is the same reason many people borrow money
>to go to college.

Translated, this means that govt borrowing is not necessarily bad, in and
of itself.  Because, in the pure world of theory, who is to say that govt
is not just another of the most productive businesses but acting in the
public interest?

Apologists (maybe not you) for the national debt always like to
point out that debt per se is not bad, *IF* the money is spent
more "wisely" by the govt than it would be by private individuals.
They don't mention that this IS NOT the case here and now.  More
importantly, they don't mention that the public really has very
little control over how "wisely" the money is spent by politicians
and that we shouldn't keep on feeding the govt and hoping for
better luck next time.  Not until we get our control back.

There is a very fundamental mechanism at work here.  Spending other
people's money simply won't be as done as wisely as spending your own.

>After having said all this you might think I think things are rosy and
>everybody should stop complaining.  Of course not, this discussion was only
>about the National debt and deficit spending.  Any spending must be justified
>as being more useful by the government than by private citizens.  This just
>isn't the case, government spending is too big.  Besides that government
>spending and regulations cause ditortions in the economy that are inefficient.
>Taxation is distorting as well.  I could start a laundry list of things the
>government shouldn't be doing: NASA, USPS, farm subsidies, Nat'l Endowment
>for the Arts, SEC etc.... But now I'm starting to rant.

Agreed.  However, all this is steady state analysis (in the sense that
it assumes that no economic parameter behaves too wildly) for a dynamic
situation.  If all such steady state analyses were valid, where do inflations,
monetary crises, depressions, market crashes, etc. come from?  In fact these
things happen all the time.  Why?  Basically, because people can and do
panic and they don't necessarily act rationally or calculatively as these
models assume.  And panic or the perception of panic can create more, real
panic and disaster.

And the beginning of this panic won't even be irrational, because the
govt simply cannot keep letting its debt grow so much faster than the
economy, in real terms.

The argument for a balanced budget is fundamentally different and more
sound than such analyses because a balanced budget, or even a sincere
effort to balance a budget at this point, will PREVENT, and not rely
on assumptions of people's behavior and a steady state to avoid, a
crisis from happening.

Let us get back to the real world: the point I have been trying to make
is that we're getting close to the point of panic and vicious cycle
RIGHT NOW.  The case for panic ultimately rests on the disbelief that
our "leaders" will ever get their fiscal house in order, and this is
a fairly accurate disbelief at present.

- Karl Wee
Xref: sparky talk.politics.misc:69919 alt.activism:21399