From: pjm@anegada.sps.mot.com (Patrick J. McGuinness)
Subject: Re: What happens when USA goes bust?
Organization: Motorola Inc., Austin TX
Date: Thu, 15 Oct 1992 22:45:09 GMT

In article <Bw4qCz.MK@apollo.hp.com> nelson_p@apollo.hp.com (Peter Nelson) writes:
>In article <1992Oct14.185636.18315@oakhill.sps.mot.com> pjm@anegada.sps.mot.com (Patrick J. McGuinness) writes:
>>> nelson_p@apollo.hp.com (Peter Nelson) writes:
>>>>
>>>>This "fin de siecle" talk, from Mr Nelson, Mr Perot, or whomever,
>>>>is useful in calling attention to the problem of the deficit and debt.
>>>>But it is hyperbole to talk as if the we are inevitably doomed.
>>>>Our economy is not sinking. We just have a simple problem - our Government
>>>>spends too much money. It has a simple (economically speaking)
>>>>solution. Stop spending more money;
>>>
>>>  But what exactly does this mean?   Do you mean "stop spending the
>>>  part > revenues"? 
>>
>>>  If so then the economy takes an immediate 
>>>  $390 billion dollar hit.   This is 10 million jobs, NOT counting
>>>  multipliers (NYT says that defense industry jobs have a multiplier
>>>  of 2.5).  
>>
>>The "stop spending" would be a multi-year effort, not a single
>>year effort. If you go and look at tax revenues, say from 1982 to 1987,
>>we got a fairly hefty increase in revenues over five years.
>
>  But that's because we had lots of GDP growth.  However a big
>  chunk of that was from deficit-spending, by both the government
>  and corporations.  These are tapped out now.  So there's no reason
>  to assume such a rate of GDP growth.

The deficit did not fuel the growth to the extent you imply.
(go back to the other points I made about the fact that
debt loads did not increase significantly in the private sector
versus assets or the total GNP; the statistics can be found in
"The Growth Experiment" by Lawrence Lindsay.)
Conversely, I disagree with the adverse effects reducing deficit
spending would have (see below).  That may be the crux of our
disagreement.

>>If we increase the economy 20% over five years, and at the same
>>time reduce the Government expenditures 20% over five years
>>we can essentially balance the budget without raising taxes.
>
>  As I said, the consensus forecast for GDP growth next year
>  in the US is 2.7%.  But lets say subsequent years are a bit,
>  higher, say, 3%.  This produces a compound growth rate of 16%
>  in GDP, which if taxes are kept steady would probably produce
>  a 16% growth in overall taxe revenues (excluding modest effects
>  from bracket creep on the income tax side).

Okay. We'll take 3% growth as the consensus.

>  However if you reduce government spending by 20% then you're 
>  looking at a $280 billion reduction during that time.  This
>  is about 7 million jobs (not counting multipliers).  Even if
>  these are distributed over 5 years, how will the economy be
>  able to absorb them plus normal growth in the workforce and
>  grow at all?   Your numbers just don't add up.

The problem I see is that we have a different model here.
If Government spending is reduced, it reduces the demand for
new borrowing. This in turn allows for lower interest rates
and funds for more private sector borrowing. Thus, there is
a stimulative effect (or you might say a lessening of the deficit
"crowding out") you ignore.
You are giving a straight Keynesian $X dollar spending = Y jobs.
This ignores the other negative effects of deficit spending
that I've mentioned.  Also, even while we are reducing the deficit,
we are still running large deficits for a few years. We are not going
to have slower growth for want of fiscal stimulation.
So even with spending reductions, we could get 3% growth.

>>Now, that implies two things: a 4% GNP increase and a 4% decrease
>>in Government spending per year for 5 years.  If you attack this as
>>Usenerdism, I'll plead guilty, because this would require extraordinary
>>skill to pull off ... I can't see any candidates doing it. 
>
>  Right, so why suggest it?

Because you suggested that the *only* way to reduce the deficit was
via 10% unemployment. This is not true. We can do it
another way: Gradually grow out of the deficit by cutting
(or at least restraining) spending and engaging in pro-growth
policies to increase tax revenues (not tax increases). 

1. Don Gibson in e-mail pointed out that a significant chunk of
the deficit is temporary - recession and S&L related funding.
(He said $200 billion real deficit) I will conservatively assume
$250 billion "real" deficit over the long term.
2. If the Fed Reserve is serious about tying the dollar to a basket
of commodities, as seems to be the case, we can look into
gold-backed bonds for part of the Government debt. This will help
lower interest rate costs.
3. With a $4 trillion debt, then assuming 3% inflation,
we can have a $120 billion deficit while keeping the debt level
the same in real terms.

The real shortfall to eliminate then is 250-120 or $130 billion,
at which point a growing economy can reduce the debt load over time.
One year to get past the S&L cleanup cost, and then 4 years
to eliminate $130 billion, or $33 billion a year.
Well, even at 3% GNP growth, we can expect that kind of revenue
increase.  And I'm not talking spending cuts unders this scenario.
All we need do is ensure that spending doesn't increase in real
terms.  This, even in the model of (spending cuts= lost jobs) is a
plausible scenario to reduce the deficit while keeping growth. 
Then after this five year period, we would look at working down the
debt in real terms and in terms of the GNP.

Either this scenario or the "eliminate it totally in 5 years" scenario
both have a few common aspects: they don't raise taxes,
and they don't put us in another recession. 
So when someone says "we *have* to raise taxes" or "we *have* to
have 10% unemployment" to cut the deficit, be aware that it's not so.
There are other ways to skin this cat.

Pat
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