From: pjm@anegada.sps.mot.com (Patrick J. McGuinness)
Subject: Re: What happens when USA goes bust?
Organization: Motorola Inc., Austin TX
Date: Wed, 14 Oct 1992 18:56:36 GMT

> nelson_p@apollo.hp.com (Peter Nelson) writes:
>.mot.com> pjm@anegada.sps.mot.com (Patrick J. McGuinness) writes:
>>> waldo@cybernet.cse.fau.edu (Todd J. Dicker) writes:
>>>nelson_p@apollo.hp.com (Peter Nelson) writes:
>>>
>>>>   The point is that a significant chunk of our ~ $5 trillion national
>>>>   economy is borrowed money -- the economy is, in effect, artificially 
>>>>   big and we now need to get back to reality.  I don't see any good way
>>>>   to do this without precipitating one of the problems suggested
>>>>   earlier: depression, high inflation, breakdown of social order, or
>>>>   a totalitarian government -- and maybe ALL of these.
>>
>>An economic program that is pro-growth but anti-debt would do best.
>>
>>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"? 

Eventually, yes. We need to have balanced budgets. A multi-year
plan to curb spending, while encouraging growth to expand the
job base is the type of solution I propose.
But "stop spending more money" is exactly what I mean.
If we stopped the *increase* in spending, we would eventually
get the deficit under control.

>  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.
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.
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. 
As for the objection that GNP growth probably won't be that strong,
I'd say that just means we will miss the mark in five years, but
will be far closer to ending the deficit, and can hit the mark in 6 or 7
years ( say with 3% growth). The growth from 1983 to 1990 was
3.5% per year; if we had that kind of growth for the next 7 years,
we could close the budget gap in that time. 

>  I agree with the "stop spending" part, but I challenge you to come
>  up with some numbers that show how we can do this and not go into
>  a double-digit unemployment rate.

Again, the Government spending cuts would be a minor decrease
from their current levels, about $50 billion a year. 
Politically a big deal, but economically minor. 

>>It would be pro-growth, and it would cut the deficit.
>
>  Do the math!   Let's see the numbers.   I say cutting the deficit
>  cannot be done without the economy taking a huge hit: The current 
>  projected FY93 deficit is about $390 billion  -- the current "con-
>  sensus forecast" (released last Friday) for GDP growth is 2.7%, i.e.
>  about $148 billion (and note that all recent consensus forecasts
>  have proved optimistic).   And if you were to cut the deficit by,
>  say, even a quarter in FY93 you would add 2.5 million to the
>  unemployment rolls, which would easily stall even the 2.7% growth
>  projected.   

Again, we'd be talking multi-year, just like Perot is doing.
I disagree with the Keynesian "less Government spending / lower
deficit = growth is slowed". Actually, if there was a perception
that the deficit was really being attacked, long term interest
rates would fall, which would more than make up for the consequence
of $50 billion less in Government spending per year. A
more pro-savings tilt would fuel investment and more jobs. 

>  So again I say, do the numbers and show us how you can get growth
>  and deficit-cutting at the same time.  

Cut regulations, encourage competition, and revamp the tax system
to encourage job creation and innovation -- that will help on the growth
side.  On the deficit side, it is a matter of freezing and minor
cuts in programs.  That's why I said combine Perot's spending plans with
Kemp's tax plans. Kemp has the best pro-growth plan out there,
and Perot has the most aggresive plan to cut spending. 


>  I still say we have to cut the deficit, and the economy be damned,
>  because if we don't it will be damned with interest down the road.

And you don't want to vote for Perot? This sounds a lot like his
attitude.

I disagree with the approach. If you hurt the economy, the deficit
*increases* because of the fall in tax revenues.  If it weren't for our
current recession, our deficit would be much less. Right? We'd be shooting
ourselves in the foot if we give in to the Hoovernomics "fix the deficit;
screw the economy" attitude. We don't need another Great Depression.

We have a lot of impediments to economic growth that, were they removed,
our economy would spring back to life. Fix the economy, keep
spending down, cut the deficit over a multi-year period.
That's the best option.

>>Lost jobs? No, we gained 18 million jobs in the years 1983 to 1990.
>>No disaster there, just the longest peacetime expansion that increased
>>our economy 30%
>
>  And if you look at the increase in government+corporate+private debt
>  you'll see that a large chunk of these jobs were financed by debt! 
>  Again, do the numbers.  

Not so.  We went through this before - the numbers I posted a few months back
showed that from 1981 to 1987 overall debt as a percentage of GNP,
and related to asset values, did not change significantly.
Yes debt increased, but so did the economy, but a large amount.
From 1990 to 1992 we have had a different story as our Government
has increased debt as the economy has been flat.

>  Note that debt per se isn't bad.  What's stupid is taking on debt
>  that exceeds your reasonably anticipated growth in asset value or
>  income.

Very true.  Again, in the 1980's the debt in the private sector was in
line with economic growth and assets. The problem is public sector debt,
which has not been in line. Yet even now federal debt as a percentage
of GNP is no worse than Japan's today, or the U.S. around 1960.
We can survive and prosper with even this debt load.
With the *deficit* that we have however, the trend is ominous.


> If I float a corporate bond at 8% compounded annual rate
>  and the money allows me to expand my company by 10% compounded 
>  annual rate, that's OK.   The stupid thing is that Americans have
>  been borrowing money at 8% or 10% or 18% (credit cards) while 
>  experiencing real growth way below this.  

True.

>  So once again, to Mr. McGuinness I implore: show us the numbers.

Approximate numbers here. ( I had a more detailed write-up around
the time of the Balanced Budget Amendment in June.)

Spending in 1992:  $1.4 trillion
Revenues in 1992:  $1.0 trillion

Assume constant dollars. This is where we would want to be:
Spending in 1997:  $1.20 trillion
Revenues in 1997:  $1.20 trillion

To get there requires that we grow the economy 20%
and we cut spending in real terms by slightly under 20% over a
5 year period. It is actually not this bad, since the deficit
is swelled by the temporary S&L bailout funding, and tax
revenues generally increase a little more than GNP increases. 
Also, even at $100 billion out of balance, the total debt would
not be increasing in real terms because of inflation.

Implementation is left to the President-elect.

Pat
	Bill Clinton: The Status-Quo Candidate