From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: The end of the Reagan Era
Date: Thu, 05 Nov 92 14:51:10 EST
Organization: IFS Project, University of Michigan
Distribution: usa
Reply-To: jwh@citi.umich.edu

In article <1992Nov5.140902.24401@mksol.dseg.ti.com>, mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
|> In <lt-=D!C@engin.umich.edu> jwh@citi.umich.edu (Jim Howe) writes:
|> 
|> >In article <1992Nov3.141621.22028@mksol.dseg.ti.com>, mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
|> >|> In <KM-=FA#@engin.umich.edu> jwh@citi.umich.edu (Jim Howe) writes:
|> >|> 
|> >|> >In article <1992Oct31.223142.21346@europa.lonestar.org>, tom@europa.lonestar.org (Tom Kimball) writes:
|> >|> 
|> >|> >There is a theory called Ricardian Equivalence which
|> >|> >posulates that revenue raised from debt is roughly equivalent to money
|> >|> >raised in taxes. [...]
|> >|> 
|> >|> A dollar of debt is MUCH worse for the economy (assuming a reasonably
|> >|> healthy economy with a reasonable demand for capital -- which we don't
|> >|> have right now).
|> >|> 
|> 
|> >How is it MUCH worse? [...]
|> 
|> But you cannot ignore the cost of money that must be paid for the
|> borrowed funds.  Hence, not only are borrowing and taxing equally bad
|> at the moment they occur, but in the borrowing case there must be
|> subsequent taxation to pay the debt and the cost of the money.
|> Overall, that looks more than twice as bad to me.  It's as if they are
|> taxing twice, plus interest.
|> 

But debt is paid back with cheaper funds.  A dollar today is worth more
than a dollar paid in 10, 20 or 30 years, even if there is no inflation.
So while the cost of $1 of debt may be higher than the cost of $1 in
tax, it is only the cost of the time value of money.  Also, as long
as people believe the government will pay back the debt, additional
funds can be raised.  A portion of these funds can be used to pay
back the old debt and interest, i.e. the debt gets rolled over.  You
may well argue that at some point taxes will be needed to cover debt
repayment, so it would be better to not incur the debt today.  However,
all you are doing is exchanging a probable tax increase in the future
for a certain tax increase in the present.  Neither solution is good.
The proper solution is to simply stop spending such a large percentage
of GNP.  At lower levels, taxes or debt are not as economically damaging.

|> >|> 
|> >|> He didn't say 'next year'.  He said 'future'.  How much does a Savings
|> >|> Bond cost and what is the face value?  It is indeed a $2:$1 payback
|> >|> 'in the future'.
|> >|> 
|> 
|> >But what is that $2-10 worth in the future.  If I give away $1 now
|> >and receive $2 in the future, that $2 is not the same as receiving
|> >$2 today.  It sounds scary to say that the future tax increase
|> >is $2-10, but what is the present value of that increase?
|> 
|> Yes, but future value of money is an 'iffy' thing.  For example,
|> interest on Savings Bonds is not allowed to fall below 6% BY LAW.
|> Assuming they don't change the law, if interest rates stay low the
|> future cost of that money turns out to be unreasonably high.

You can bet that if the cost of money remains low, the law *will*
change.  Given the political nature of Congress, they probably
wouldn't explicitly lower the rate, they would simply tax back
a portion of the proceeds, effectively lowering the rate.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
Newsgroups: alt.politics.elections,alt.politics.clinton