From: ald@clipper.ingr.com (Al Date)
Newsgroups: sci.econ
Subject: Re: Confronting the Deficit/Debt Boogyman
Date: 7 Apr 92 20:59:23 GMT
Organization: Intergraph Advanced Processor Division - Palo Alto, CA

In article <1992Mar30.061109.26002@nuscc.nus.sg> ipser@solomon.technet.sg (Ed Ipser) writes:
>
>
>In article <1992Mar28.235325.16534@Princeton.EDU> jmo@courant.princeton.edu (Mike Orszag) writes:
>>The levels of debt in the late 19th century were relatively low and were
>>accompanied by a growing economy.
>
>They were also accompanied by a working Tenth amendment and, generally, a
>much smaller federal government. Also, this was before the corporate income
>tax and the tax on capital gains which together decrease the value of equity
>as an instrument of investment financing. But I'm digressing.
>
>
>Let's return to the issue: How is it harmful to the US economy to decrease
>the net assets held by the US federal government?


I admit to being seduced by Mr. Ipser's argument, but I have more questions
than answers.

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.

Of course, if any entity devalues its assets into the ground, 
it is equivalent to being bankrupt, is it not?
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.

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,
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?

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.

The question I would ask Mr. Ipser is: Isnt the govt in or approaching
a position of negative net worth?  
If liabilities exceed assets by a large amount then doesnt
the issue of the devaluation of govt assets become irrelevant to the
issue of govt cash flow (with immediate repercussions in the economy)?  

And, isnt the debt run-up not only a devaluer of the govt's assets, but
also a threat to its very viability?  I am no fan of the status quo
of statist govt, but it seems imprudent to let it destroy itself by
profligacy.  But then, maybe it is inevitable.

Perhaps we should start planning for the next Republic.


--Al Date
Xref: sparky sci.econ:3793 misc.taxes:2277