From: doli@troi.cc.rochester.edu (David Oliver)
Newsgroups: talk.politics.misc,talk.politics.theory,alt.rush-limbaugh
Subject: 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: 22 Jan 93 17:48:56 GMT
Organization: University of Rochester (Rochester, NY)

In article <1993Jan22.052159.536@rigel.econ.uga.edu> depken@rigel.econ.uga.edu (Craig Depken) writes:
>The major problem with the American public when they try to talk about these types of topics
>is unbelievable economic illiteracy. By that I mean, they are talking about what they have
>heard in the press, by the candidates, etc. all of which is usually bunk or turned around
>so to make it more to their decided position. Problem is that most of the time the press
>and the politicians bastardize true economic theory to such an extent that it makes anyone
>who happens to be an economist want to puke and then kill.
>
>So, in answer to the deficit not being bad, there is always two sides.
>
>First, the general idea of deficit spending is not bad. John Maynard Keynes introduced the
>idea of deficit spending in his models (see Economic Consequences of the Peace, General
>Theory, et al) JMK initially took the Classical economic model (which demanded full employment
>or full use of all possible resources at all times) and changed it so as to help explain
>why the world was in depression during the 1920's. 
                                            ^^^^^^^----->1930's

>
>He proposed a paradym that showed how a lack of full employment could persist throughout
>the economy through time. His proposed solution for this problem (one of many) was the
>idea of deficit spending. He showed how government [G] could run a deficit at times of
>recession or depression and use the funds to purchase goods and services so as to move
>the economy towards full employment. This is what is commonly called "jump-starting"
>the economy. That is a misnomer, because you can only "jump-start" something that is
>dead...you can get out of something that is moving, even if it is moving very slowly,
>and try to push a little bit, but you don't jump-start it.
>
>Anyway, JMK proposed that [G] would use the deficit spending, i.e. run in the red,
>until the economy and those in the economy began to pick up steam. The trick to 
>the JMK proposition was that [G] was to then run a surplus as times became better.
>
>This is the major problem with the idea of deficit spending. You cannot spend money
>constantly and constantly be borrowing money. It is called "crowding-out" in economic
>lingo. The idea of constantly borrowing money from individuals, corporations, banks,
>etc, is counterproductive in the long run. The government is competing with privat
>consumption and investment and any money it takes in cannot be spent to improve
>the individual as much as if he/she spent it on themselves (see future discussion
>on public goods, etc).
>
>So, JMK, the father of deficit spending, has been misinterpreted, ignored, or otherwise
>basterdized. He suggested gov't spending as a means for improving the state of a 
>recessed or depressed economy, but he did not call for excessive gov't spending during
>times of prosperity. In fact, he called for G to collect taxes, etc. (not in excess, though)
>so as to build up a surplus of money, i.e. save it for a rainy (or depressed) day.
>
>We have promptly forgotten that in our quest for more and more gov't activity in our world.
>
>The deficit is not necessarily bad. But in our case, i.e. the U.S. of A., it is bad. The
>reason is that there is no end to it, and there will be none. The gov't continues to 
>borrow money from individuals in this country (i.e. through bonds), and takes potential
>consumption funds away from the individual or the bank. If the gov't borrows from other
>gov'ts in the world, then it is borrowing money that could have been spent on goods 
>that are produced in this country. This "crowding out" of private consumption and 
>investment is what is so destructive about the current format of deficit spending.
>
>More to come, but please don't talk about things based upon what you have read in
>the press, etc (Does not apply to all). Economic illiteracy is infuriating.

I agree that economic illiteracy is infuriating...so I'm infuriated by this
aricle.  ;-)

"Crowding out" is NOT the when the government takes money from people that the
individual would've used for consumption.  If this is a problem, it isn't a 
problem of the deficit, but of government spending; i.e. whether the
government can more productively and/or effectively a dollar it takes away
from and individual than the individual can themself.  "Crowding out", however,
refers to the situation the government runs a deficit and finances it with
borrowing.  Since the supply of loanable money doesn't change and the demand
for borrowing has gone up, due to the government, the interest rate, or price
of borrowing, must go up.  As the Law of Demand tells us if the price of a
good rises then the amount of private borrowing must go down.  The amount
that private investment goes down due to the government running a deficit is
what is commonly referred to as "crowding out".

I don't want to get into anymore specifics of this article, but I will add my
own version of the "deficits are/aren't a bad thing" debate. There seem
to be two aspects involved: 1) the actual funding of the deficit throught
borrowing; i.e. the "crowding out" effect; and 2) the payment of the debt; i.e.
are we motgaging our future for the present? and money spent to pay interest
on the debt can't be used more productively by the government, etc.

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.  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.  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".

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.

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.

-David Oliver (doli@troi.cc.rochester.edu)

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