From: wells@stein.u.washington.edu (Vernon Wells)
Newsgroups: talk.politics.misc,alt.fan.rush-limbaugh
Subject: Re: Debt Not Necessarily Bad
Date: 23 Jan 1993 00:33:14 GMT
Organization: University of Washington
NNTP-Posting-Host: stein.u.washington.edu

borden@head-cfa.harvard.edu (Dave Borden) writes:


>This is my view on the national debt, which I think is essentially common sense. 
>Debt in and of itself in never good.  It's possible to borrow and invest in such
>a way that the return from the investment exceeds the cost of the debt.  This is
>responsible investment, when it takes place.  Purchase of a house is a
>responsible investment, if one can subsequently balance one's budget to meet
>one's mortgage payments without having to take out other loans, second mortgages,
>etc.  Such other loans can be taken out for other purposes, of course.  Borrowing
>to finance an education is generally a responsible investment; of course one has
>to be able to subsequently balance one's budget and meet those loan payments
>without borrowing more money to do it.  But the fact that these types of
>borrowing can be done responsibly does not make the debt itself "good"; it's only
>less bad than the return from the investment is good.  If one can invest without
>having to borrow, than that's the best scenario of all.  (Of course, sometimes
>one chooses to borrow even so, to maintain a certain standard of living, to
>maintain liquidity, to put one's money into other investments, etc.)

Actually for the government, the incurring of a deficit is not necessarily
a "bad" thing.  This is my contention:

If a government were to have set its tax rates at a given average
percentage, and then set its expeditures at a level X, a level which is
equal to the total tax receipts (that is, the average tax rates x total
income) during moderate or "average" growth, then consider the following:

When a recession occurs (which is inevitable in the business cycle), then
inflation decreases and unemployment increases (with a few exceptions --
esp in periods of stagflation).  That means that the total tax receipts,
at a constant tax rate, will fall (less people have jobs, and people are
generally making less money -- hence the cause of the recession).  At the
government's rate of expeditures, X, a deficit will occur (receipts have
fallen below that "average" rate, along with growth.)  This is the signal
of a good thing.  Why?  Because that means that the government is incurring
debt, which is in turn caused by extra spending.  This helps to stimulate the
economy by putting
more money on the market.  (Mind you that when the government issues debt,
it will pay it back over time, probably after the recession ends. 
Therefore, it is not taking as much money, in the issuance of bonds, out
of the supply as it is immediately putting in.)

The other side of the coin in my model is this: When growth exceeds that
"average" level, then unemployment drops and inflationary pressures begin. 
Now the government, with higher tax receipts, will begin to build a
surplus.  This is also good.  Why?  Because the government is taking extra
money out of supply, thereby controlling spiraling expenditures, thereby
helping to allay those inflationary pressures.  The important thing,
though, is that the government compound that surplus, that is, not spend
it until the "average" level is reached.  That would do nothing more than
fuel inflation.  (That includes paying off debts, which would simply
redistribute that tax income, and still help to fuel inflation.)

This mechanism is "good" because it gives the government an effective
*passive* method of leavening the business cycle, whose effects, many
agree, are not
good, at least in the most limited sense.  If the government tries to do
it actively (ie through quick tax breaks and large added expeditures)
multiple problems arise.  The most important are these: those active plans
take time to initiate, and by the time they go into effect they may do
more harm than good; and active fixes may be misjudged.  Consider this: 
As the recent recession proves, it takes a long time for people to know
that they are in a recession, and even longer to figure out whether they
are out of one or not.  By the time the government knows that they are in
recession, it may already be practically over, so tax cuts, for
example, when effective, would only help to drive inflationary pressures
because they would be releasing a large amount of money for immediate
expediture when it is least "needed" (during high growth and subsequent
high inflation.)

Now, I do not say in any way that the US Govn't operates under this model.
 They do all sorts of tweeking, and their expeditures are far higher than
"average" for tax receipts.  But I do contend, for these reasons, that
debt, at least for the Govn't aggragate is not necessarily "bad".  And for
business, this is true also.  For high Capital industries, it would be
impossible to compete with entrenched companies without incurring debt. 
Debt helps them to grow.  But I digress.  The former poster said that
sometimes debt was "necessary" for particular reasons, and I assume he
also meant "unavoidable" as well.  It is avoidable, consistently at least,
for the US govn't, and they have done a poor job at that.

Feel free to E-mail, but please make all posts on talk.politics.misc,
because that is the only group that I read.  Thank you for your time and
attention.

Vernon Wells (wells@u.washington.edu)

Newsgroups: talk.politics.misc,alt.activism,alt.conspiracy,alt.fan.rush-limbaugh