From: mje@pookie.pass.wayne.edu (Michael J. Edelman)
Subject: Re: This "Interest Rates are Sucking up the
Reply-To: mje@pookie.pass.wayne.edu
Organization: Wayne State University
Date: Tue, 26 Jan 1993 16:31:03 GMT

 In article 151w@austin.ibm.com, alan@auntbea.austin.ibm.com (Alan R. Weiss) writes:
                  [...]
>
>You should feel silly for saying this, Ed, for the following reasons:
>
>	1.  Public debt crowds out private investment.  Have you
>	    tried getting, say, venture capital in the last few years?
>	    Tried getting a bank loan for a new business?  ALL Economists
>	    believe that public debt competes with private debt for
>	    the investor dollar.

Yes and no. As an investor, why would you put your money in public as opposed to 
private debt? Only when there was a strong profit incentive. What drives 
investment money into public debt is not the mere exsistence of such debt, but rather
high taxes and inflation. Look at the high marginal tax rates before the Reagan
tax bill. Although there were rates in excess of 75%, no one paid them. Money went
offshore and into government securities. The lowering of the highest marginal 
rate combined with the elimination of loopholes actually resulted in the "rich"
paying more taxes, and paid a larger share of the tax bite than before. This is
not as paradoxical as it sounds. They simply exposed more capital to taxes by
increasing privaet sector investment. 

High inflation rates combine with taxes to result in short-term effctive marginal
rates in excess of 100% at times. This also forces more money into the public
sector and other non-taxable investments.

The tax code was also responsible for the shortage of venture capital money in the
70s and 80s that created the market for junk bonds as a substitute. Thus ventures
like Turner Cable and Sprint were financed by junk bonds rather than by banks
or by venture capital. It was a response to the tax structure.
>
>	2.  What have we got to SHOW for all this debt?  I mean, was
>	    it invested in "infrastructure" (i.e. new roads, schools,
>	    productive enterprises earning a profit, etc)?  No.
>	    It was consumed.  It may have kept some people alive for
>	    awhile, but it did not increase aggregate wealth.  It has
>	    been a rathole.

Mostly pork. WHile defense spending has dropped 50% since the 50s (when 
expressed as a % of GNP) non-defense spending has trebled, going from 7% to about
20% of GNP. Tax revenues have grown from 18% to 19.4% of GNP while spending has
increased overall from 18% to 24-25% of GNP.

>
>	3.  As the debt mounts, the pressure for more and more taxes
>	    increases.  Even more dollars are allocated to servicing
>	    the debt, instead of spending it on other things.

Again, only a problem when debt growth outstrips GNP growth. Like now. But
it's hardly a new problem.
>
>	4.  While bondholders and debtholders MAY reinvest the
>	    transfers into productive enterprises (stock market,
>	    VC money, etc), MOST simply roll it over into more
>	    public debt.

Unsubstantiated, and it misses the point besides. See comments on #1 regarding
how the tax code and inflation are the greater influence on where money is
invested.
>	
>	5.  It tends to drive up interest rates.  While interest rates
>	    are farely low right now, wait and see what they will be ...

Not really. Short-term t-bills are curretnly paying under 3%, according to
today's WSJ. Since the debt has been high for some time, what process is
the writer assuming will suddenly drive them up? He's also not saying 
whether he's talking about short-term or long-term debt, and there's quite
a difference. The tilt right now is a rather historic 4% or more.
>
>	6.  Anyone who cares about the GNP is a fool.  It is the NNP
>	    (Net National Product) that counts.  Interest on the debt
>	    is not counted in the NNP, is it?

I think this shows a further lack of understanding of how these figures
are computed, and what they mean. You have to look at debt/GNP ratios, for one.
You can't compare unadjusted figures, whether GNP, GDP, NNP or whatever. For
example, although the debt/GNP fraction was about 45% in 1990, it was over 125%
in 1945. It was paid down to a fraction of that in a few years via increased
GNP with no tax increase beyond the 0.5%/decade gradual rise we've seen throughout
the postwar period.
>
>	7.  While America consumes, Japan and the EC invest.

Not strictly true. Again, compare the tax codes. Japan and German have zero
or negligible capital gains taxes. They understand the incentive structure. Here, 
politicians call it a "rich man's tax" for the short-term political incentive
at the expense of your long-term economic health.
>
>-- 
>   _  Alan R. Weiss   IBM AWS Austin-AIX Kernel   11501 Burnet Rd, Bld 905
> _| ~-. alan%auntbea.austin.ibm.com@ibmpa.awdpa.ibm.com | Austin, TX 78758
> \, *_} arweiss@netftp.austin.ibm.com  - NEW ADDRESS    | 512-838-8281
>   \(   DISCLAIMER:  Working at, not speaking for, IBM  | alan@auntbea

--mike edelman


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