From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: All deficits are not created equal.
Date: Mon, 05 Oct 92 11:20:54 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

In article <1992Oct3.133846.9484@aio.jsc.nasa.gov>, walker@superman.jsc.nasa.gov (Doug Walker) writes:
|> In article <1992Oct2.235319.4749@u.washington.edu> sieferme@milton.u.washington.edu (Eric Sieferman) writes:
|> >[...]
|> >
|> >The context of my quotation about the deficit was that
|> >of HRP's severe plans to eliminate the federal budget deficit.
|> >My point was that the deficit as it now stands is not 
|> >as disastrous as HRP's plans to end it.
|> >
|> >There is nothing inherently wrong with a deficit; it
|> >depends upon how the deficit is funded and what the
|> >money is spent on.
|> >
|> >[...]
|>
|> Well, unless you can find me some references, or something more
|> substantial to back up your statements I don't think you have many valid
|> points.  Curing the deficit, actually not just the deficit but the DEBT,
|> may not fix the economy.  I agree they are seperate issues.  But they
|> BOTH need to be addressed in a way which shows a course of action which
|> will work,IMHO.
|> 

There are several issues related to the deficit and debt that are rarely
discussed, and yet are very important.  The first is level of debt.
Debt by itself is not a problem, it is the amount of debt relative
to your income that can create a problem.  If you earn $20,000/year,
it would probably be unwise to purchase a $400,000 house.  However,
if you earn $200,000, the mortgage on the $400,000 house isn't so bad.
For the U.S. the important thing is what is the ratio of debt to GNP.
If you examine the debt/GNP percentage for the major industrialized
nations, you will find that the U.S. is *not* the leader, that distinction
goes to Japan (I believe).  Our debt/GNP percentage is not historically
out of line either.  In other words, our current debt situation is
not dramatically different than it has been in the past.  The nominal
numbers are higher, but our economy is also much larger.  Another
thing to remember about debt is that inflation erodes it.  If at
the end of year X you had a debt of 600,000,000, if inflation were
10%, you could add 60,000,000 to the debt and not be any worse off.
Any amount less than 60,000,000 would actually result in a real
decrease in the debt owed.  Currently our inflation is nowhere near
10% (thank god) but the concept remains.

As far as the deficit is concerned, you need to remember that the
deficit is only the difference between receipts and expenditures.
No adjustments are made for the type of expenditures.  Expenditures
on capital investments are reasonable things to take loans out to
do.  It probably isn't reasonable to take out a loan for non-investment
expenditures.  When an individual purchases a house, they generally
don't think about the full purchase price, they worry about the mortgage
payment.  Under the government defict accounting procedure, a person
with a $200,000 income who purchases a $400,000 house has run a
$200,000 deficit in the year the house was purchased.  This is a stupid
way to do accounting.

The main point of all this is to show that the 'deficit' and 'debt'
are not the bogeymen that most politicians make them out to be.
As long as the deficit is not monetized, the impact on the economy
is minimal, at least at current levels.  Does this mean we shouldn't
do something about it?  No, it just means that it would be foolish
to ruin the economy in order to solve a 'problem' that really isn't
as bad as people would like to think.  Perot's proposal is the most
idiodic.  Many of his ideas would simply kill economic growth, and
in turn reduce revenues available to the government.  Many of his ideas
would make the economy worse, and would therefore result in lower
tax revenues, leading to bigger deficits (unless spending were truely
cut).


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

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