From: jamie@[128.127.2.100]  (Jamie O'Keefe)
Subject: Re: Confronting the Deficit/Debt Boogyman
Nntp-Software: PC/TCP NNTP
Organization: FTP Software, Inc., Wakefield, MA
Date: Thu, 09 Apr 1992 08:01:33

In article <1992Apr8.034323.3954@nuscc.nus.sg> ipser@solomon.technet.sg (Ed Ipser) writes:

 >>It is almost an article of faith (and I confess to being a believer myself)
 >>that the runaway national debt portends ultimate economic disaster.
 >>I find the Ipser argument that the rising debt is merely 
 >>equivalent to a devaluation in net assets held by the federal govt
 >>to be intriguing, to say the least.  Please correct me if I misstate
 >>the proposition.

The US government debt is ~50% of GNP.  After World Ware II it was
100%.  While the 90's are not likely to be boom years like the
50's/60's,  this does not mean that we can not reduce the deficit.
It will take a number of hard choices, i.e. taxes increases or spending
cuts or both.  Both Germany and Japan have high government deficits. 
However, they save more then we do and thus their investment rate
does not suffer as much.
  
 >This is the essence of my argument. Whereas states, cities, corporations,
 >and households have tended to use debt to pay for the purchase of other
 >assets (e.g. bridges, roads, collesiums, capital equipment, houses, etc.)
 >the federal government is issuing bonds to pay for welfare spending. It
 >borrows and then gives the money away.

While I agree that our government does not invest enough, I will
point out that welfare spending is a small percentage of the US 
government budget.  Entitlements such as Medicaid, Medicare, Social 
Security are much higher and most likely growing faster as the 
population ages.

 >>Of course, if any entity devalues its assets into the ground, 
 >>it is equivalent to being bankrupt, is it not?
 >
 >Well, if not bankruptcy, then Chapter 11 reorganization will be the
 >ultimate result if the process continues unabated.

The government is not a corporation nor is it a person.  It will not
file for chapter 11, nor should it.  While I agree that we need to 
force our government to use better accounting procedures, I do not
agree it would be useful for the government to file for chapter 11.
                           
 >>I guess one premise that we have to question is whether govt bankruptcy
 >>is necessarily bad for the economy.  If this were to stop govt
 >>borrowing and otherwise proscribe the activities of govt, it might 
 >>be an economic positive at some point.
 >
 >Heresy! Get thee behind me Satan!

Heresy?  Hardly.  Of course this means that you would have to cut
back on spending.  Either government spending or your own spending
due to higher taxes.

 >>Certainly there are negative side effects of a bankrupt govt, especially
 >>when there is no White Knight on the horizon.  
 >>The problem I see is that this govt has the power to extract wealth
 >>from the people to ameliorate the side effects of its (impending) 
 >>bankruptcy.  The govt could do this through taxes or inflation,
 >
 >There is also the option of privatization and default. In the former case,
 >there would be no catastrophe, in the later case, the federal government
 >would crash dragging down the lenders with it.

Both rather unlikely.

 >>but if it were approaching a point where interest payments on the
 >>national debt were exceeding national income, it is unlikely that
 >>it could continue to borrow at some point.  Or could it?
 >
 >At some point, lenders will begin to question the government's ability to
 >pay interest on the bonds, much less repay them. This will first show up
 >as an increased interest rate on government bonds which will, in turn,
 >accelerate the process. At the same time, the prospect that the
 >government might be unable to roll over its current debt will threaten
 >the value of bonds currently held and temper lending toward such a
 >situation.

Right.   Many state governments went through this in the late 80's and
early 90's.

 >Also, as an ever greater percentage of government spending goes for
 >interest payments, people will begin to look to other institutions to
 >solve their problems.

Or perhaps the people would decide to throw out the people in office
and choose people who will make the difficult choices.  They
certainly have in Massachusetts.

 >>The risk of wealth expropriation during the fiscal devaluation of govt is
 >>IMO what threatens the economy. Everywhere we hear that it is time to
 >>soak the rich.  As things deteriorate, envy is likely to become
 >>pandemic.  Envy leads to expropriation, which kills investment, which
 >>destroys an economy.

Wait a minute.  Are the wealthy the only people who invest?  Should
they be?  If taxes on the wealthy were higher and taxes on the middle
class/poor were lower, might the middle class save more and thus feel
more secure in life.  Might lead to a better society.  

 >It is important to distinguish between confiscatory taxes and outright
 >confiscation or expropriation. The possiblity of new large scale
 >confiscatory taxes seems pretty remote so long as the Republicans control
 >the presidency. Moreover, the liquidity of capital, today, makes it
 >extremely difficult for governments to institute discriminatory taxation.
 >Add to this the fact that such taxes would likely REDUCE federal tax
 >revenues, it seems unlikely that even if such taxes were instituted, they
 >would get the federal govenment out of its current bind.
 >
 >Expropriation is perhaps the worst possible outcome, and the least probable.
 >First, such expropriation would be unconstitutional and coupled with a loss
 >of faith in the federal government's solvency, any large scale attempt by
 >the federal government to, for example, as once poster put it, sell
 >California to the Japanese, would most likely result in secession and/or
 >civil war. The idea that the federal government is going to nationalize
 >private property to pay down the debt is fairly far fetched and totally
 >impossible.
 >
 >In fact, it is precisely because socialism has lost its popular allure that
 >the federal government is in the bind that it is today. As more and more
 >people come to see government not as the solution, but as the problem, its
 >ability to coerce others to its will becomes successively weaker. It
 >is important to note that, accoding to pollsters, the new generation of
 >Americans is the most Republican since the Civil War.

How many are willing to vote for a President that has no clue about
what they are going though.  The President that seems more in touch
with the wealthy 10% then with the common person.  This is not likely
to help him, the Republicans, or our Republic.

 >The absolute worst possible thing for the economy would be for the federal
 >government to try to tax its way out of the deficit/debt as Bush tried to
 >do.

It is unlikely they will do this.

 >>The question I would ask Mr. Ipser is: Isnt the govt in or approaching
 >>a position of negative net worth?  
 >
 >This depends entirely on the value of the assets held by the federal
 >government and the method of evaluating them. The appropriate method of
 >evaluating the government's assets is to consider what they would be worth
 >in the hands of private citizens. In the event of an equity for debt
 >swap, bond holders will find themselves in possession of federal assets
 >and the bond value they would be willing to relinquish for the title to,
 >say, federal park land, would bear little relationship to the amount of
 >income generated by that parkland under federal administration.
 >
 >An alternative perspective is provided by the continued willingness of
 >lenders to buy bonds. The idea that government bonds are of the highest
 >rating by definition or such is entirely without foundation. There are
 >many states and cities, for example, where it is considered more
 >dangerous to lend to the government than to coroporations operating
 >within the government's jurisdiction. Yet federal bonds remain of the
 >highest reputation. The market seems to consider them quite safe
 >investments despite a $4 trillion debt and $300 billion annual interest
 >payments. If bond holders are not worried about default or inflation, why
 >should we?
 >
 >At this point in time, I don't think the evidence supports the assertion
 >that federal liability exceeds federal assets.

Your observation was well thought out. 

 >>But then, maybe it is inevitable.
 >
 >I hate questions of inevitability. Let's just say that it is the current
 >trend barring some major change in politics. In fact, if anything, opponents
 >of the deficit/debt underestimate the political tenacity of it. Consider:
 >how are you going to convince an electorate addicted to a higher level of
 >federal spending than federal taxes (currently $100 billion) that in order
 >to save the welfare state, they will have to suffer a higher level of taxes
 >than spending? How much more? Well, at least $300 billion more just to keep
 >the debt in check since that is the amount of interest payments.
 >
 >Little wonder, then, that politicians can't resist raising spending by a
 >$1.50 for every $1 in new taxe revenues.

Good point.  Sounds like our solution is to change people's attitudes
and the government will follow.

 >>Perhaps we should start planning for the next Republic.
 >
 >Let's work instead on restoring the one authorized by the US Constitution.
 >In a post-Cold War environment, a federal government constrained to its
 >constitutional powers of national defense, foreign policy, and interstate
 >relations should be orders of magnitude smaller than the welfare state we
 >have today.

Not all of the welfare state is bad.  US public schools were the best
in the world a few decades ago.  Public higher education still is in
a large number of cases.  Both can be the best if we choose.  However, 
many of the problems with education are caused by problems with our 
society as much as by top heavy school systems.   

 >The government outlined in the US Constitution may not be perfect, but it
 >is better than the one we have now.

Maybe.  But, the era we live in now is far better then the 1920's.

jamie
--
Jamie O'Keefe		FTP Software, Inc.	Technical Support
Phone: 01-617-246-2920	Fax: 01-617-245-7943	Email: jamie@ftp.com