From: ipser@solomon.technet.sg (Ed Ipser)
Subject: Re: Confronting the Deficit/Debt Boogyman
Organization: TECHNET, Singapore
Date: Fri, 10 Apr 1992 05:06:12 GMT

In article <920409080133@pericles.ftp.com> jamie@[128.127.2.100] (Jamie O'Keefe) writes:
>In article <1992Apr8.034323.3954@nuscc.nus.sg> ipser@solomon.technet.sg (Ed Ipser) writes:
> >This is the essence of my argument. Whereas states, cities, corporations,
> >and households have tended to use debt to pay for the purchase of other
> >assets (e.g. bridges, roads, collesiums, capital equipment, houses, etc.)
> >the federal government is issuing bonds to pay for welfare spending. It
> >borrows and then gives the money away.
>
>While I agree that our government does not invest enough, I will
>point out that welfare spending is a small percentage of the US 
>government budget.  Entitlements such as Medicaid, Medicare, Social 
>Security are much higher and most likely growing faster as the 
>population ages.

That depends on how you define welfare spending. Perhaps you don't like to 
view the NEA as a welfare program for snobs who don't want to pay for
art. By welfare spending I was giving the benefit of the doubt on such
subjects as Medicaid, Medicare, Social Security, etc. Lets say transfer
payments, then.

Transfer payments make up the bulk of federal spending particularly as
military spending is cut back:

    31% Social Security, Medicare, and other retirement benefits.
    23% Defense
    14% debt interest.
    14% agricultural programs, environmental pgms, education assistance,
        job pgms, bank insurance, NASA, assisted housing
     7% Medicaid, food stamps, AFDC, etc (matched by the states)
     5% Health research, public health, public housing, social services
     2% veterans benefits
     2% law enforcement and general govt
     1% foreign affairs

Look through this list and find non-defense spending that creates assets
owned by the federal government. There aren't many.

>The government is not a corporation nor is it a person.  It will not
>file for chapter 11, nor should it.  While I agree that we need to 
>force our government to use better accounting procedures, I do not
>agree it would be useful for the government to file for chapter 11.

I was being facetious, of course. Nevertheless, if a fiscal crunch were to
confront the government, it would be forced to make many hard choices much
like a corporation in Chapter 11. There are plenty of precendents in the
governmental sector so the argument that the federal government, as a
government, is immune is incorrect.

> >>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,
> >
> >There is also the option of privatization and default. In the former case,
> >there would be no catastrophe, in the later case, the federal government
> >would crash dragging down the lenders with it.
>
>Both rather unlikely.

While I agree that default is improbable (though far likelier than outright
confiscation of private property) I don't agree that privatization is so
improbable. In fact, privatization is happening everywhere EXCEPT the federal
government. Cities are privatizing, states are privatizing, corporations
are downsizing and divesting, other national governments around the world
are privatizing.

Moreover, privatization is the economically correct path and the least
politically painful one. It is only a matter of time until experiments in
privatization at lower levels of goverment filter up to the federal level.

> >Also, as an ever greater percentage of government spending goes for
> >interest payments, people will begin to look to other institutions to
> >solve their problems.
>
>Or perhaps the people would decide to throw out the people in office
>and choose people who will make the difficult choices.  They
>certainly have in Massachusetts.

And in Massachusetts we have a governor who is cutting the budget without
raising taxes. On the other hand, in California we have a governor who is
raising taxes without cutting the budget. Judging from the results in
New Jersey, I know who I'll put my money on. (Despite the record increase
in taxes, the state of California is already facing budget shortfalls of
historic porportions not to mention business closing and fleeing the
state in record numbers.)

> >>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.
>
>Wait a minute.  Are the wealthy the only people who invest?  Should
>they be?  If taxes on the wealthy were higher and taxes on the middle
>class/poor were lower, might the middle class save more and thus feel
>more secure in life.  Might lead to a better society.  

I wholeheartedly agree. In fact, one of my pet peeves with traditional
economics is that it undercounts investment by the middle and poor.
For example, when you attend college, the fees you pay are considered as
consumption spending, not investment or savings. Economists even go so
far as to say that people save for college. Of course, not all college
degrees are equally productive investments.

However, while I agree that taxes need to be lower on the middle and poor,
I won't go along with an increase in taxes on the rich nor do I expect that
Bush will. Senator Moynihan had a plan for lowering the Social Security
tax that was blasted from both sides.

Sooner or later you have to confront the question as to why manufacturing
jobs are being exported from the US when unemployent is so high in America's
inner cities.

> >The absolute worst possible thing for the economy would be for the federal
> >government to try to tax its way out of the deficit/debt as Bush tried to
> >do.
>
>It is unlikely they will do this.

Well, they did in 1990 but it resulting in even higher spending and bigger
deficits not to mention a recession. (The irony is extreme in that Brady
and Darman pushed Bush into breaking his "no new taxes" pledge because
they feared that the deficit would cause high interest rates and that would
kill the Reagan expansion around the time of the election. Well, they solved
the high interest rate problem.) I tend to think that they won't do it
again.

> >>But then, maybe it is inevitable.
> >
> >I hate questions of inevitability. Let's just say that it is the current
> >trend barring some major change in politics. In fact, if anything, opponents
> >of the deficit/debt underestimate the political tenacity of it. Consider:
> >how are you going to convince an electorate addicted to a higher level of
> >federal spending than federal taxes (currently $100 billion) that in order
> >to save the welfare state, they will have to suffer a higher level of taxes
> >than spending? How much more? Well, at least $300 billion more just to keep
> >the debt in check since that is the amount of interest payments.
> >
> >Little wonder, then, that politicians can't resist raising spending by a
> >$1.50 for every $1 in new taxe revenues.
>
>Good point.  Sounds like our solution is to change people's attitudes
>and the government will follow.

But there is no economic basis for simply changing people's attitude to
anti-deficit/debt. The problem is spending, not borrowing. Thus more taxes
won't solve the problem and evidence indicates that it makes the problem
worse.

> >>Perhaps we should start planning for the next Republic.
> >
> >Let's work instead on restoring the one authorized by the US Constitution.
> >In a post-Cold War environment, a federal government constrained to its
> >constitutional powers of national defense, foreign policy, and interstate
> >relations should be orders of magnitude smaller than the welfare state we
> >have today.
>
>Not all of the welfare state is bad.  US public schools were the best
>in the world a few decades ago.  Public higher education still is in
>a large number of cases.  Both can be the best if we choose.  However, 
>many of the problems with education are caused by problems with our 
>society as much as by top heavy school systems.   

In fact, public education has always been a strictly non-federal
institution. In most cases, even today, education is private, community,
or at worst, supported by the state. Education is a perfect example of
something that the federal government has absolutely no business messing
with.

What American education needs is devolution back to the community and
the individual (students and parents) not nationalization. The most
successful experiments in public education to date involve devolution,
not centralization, of choice and authority.

> >The government outlined in the US Constitution may not be perfect, but it
> >is better than the one we have now.
>
>Maybe.  But, the era we live in now is far better then the 1920's.

A pre-20th century, pre-socialist (essentially constitutional) division of
powers between the people, states, and federal government coupled with the
state of technology in the modern world would be the ultimate society. It
is time to get America back on the path to growth. And the number one block
on that path is the federal government.