From: dong@oakhill.sps.mot.com (Don M. Gibson)
Subject: Re: All deficits are not created equal.
Reply-To: dong@oakhill.sps.mot.com
Organization: Motorola Semiconductor Products Sector
Date: Fri, 9 Oct 1992 17:45:31 GMT


>Let me get this straight.  If we weren't running a deficit, we could
>run a deficit and improve the economy.
Yes.

 > But we are running a deficit,
>so it would seem that the economy should be improving.
NO.  it is not the accounting result that improves the economy, it
is the burst of govt. spending not balanced by taxation that boosts
the economy.  

>
>|> >  If Keynesian pump priming is
>|> >supposed to work, why are we in a recession with such a large deficit?
>|> 
>|> -business cycle
>|> -M2 tightening
>|> -global economic downturn
>|> -no confidence in bush
>|> 
>
>All good points.  However, if running a deficit would help the economy,
>but our current deficit doesn't appear to be helping the economy, wouldn't
>that simply suggest that we need to run a bigger deficit?

can't that would impact too negatively on the capital markets.


>  Of course
>this whole notion of Keynesian pump priming is garbage.  Unless the
>deficit is monetized, leading to inflation, you can not make the economy
>grow by taking money from taxpayers (who would spend and save it) and
>give it to the government to spend.  You may rearrange the economy
>but you won't make it grow.  Keynes believed that inflation was a 
>valuable tool because you could give the illusion of a growing 
>economy and workers were too stupid to realize that their purchasing
>power was actually declining.  Keynes also got very confused when
>dealing with the terms 'saving' and 'investment'.  Sometimes he
>stated that saving was investment, and other times he stated 
>otherwise.

all deficits/debts are monetized, because we will always have some
inflation.  but, govt. can increase the spending velocity.  This 
swirls the pot instead of really adding more soup.  


>
>Let me give you my reasons why we are in a recession:
>
>- business cycle
>- tax increases at the start of the recession
>- overcompensation for S&L debacle resulting in overly conservative
>  bank loans
>- Collapse of the junk bond market (although it is starting to recover)

those are certainly factors.  
>
>|> >As to the fact that the deficit sucks up > 1/2 of investment capital,
>|> >I would like to see a source for that figure.  If the government 
>|> >borrowing is so detrimental, why are interest rates so low?
>|>
>|> are they?  some would say that >5% real rates is pretty high for
>|> a pseudo-recession.
>|> 
>
>The various Fed rates are the lowest they've been since the 60's, I
>believe.  Interest rates still carry a residual inflation premium.
>Real interest rates have dropped even while deficits increased.
sure, the overnight rate is low, but that is not as good a measure
as the 30 year T-Bill rate that is set by market forces.  in a 
recession capital demand is low and interest rates should be low
also.  again, >5% is kind of high.  some of that is of course fear
of inflation increasing a few points.
>
>|> >  The point
>|> >is that there is plenty of capital to support the deficit.  It isn't
>|> >adversly impacting the capital markets.  Government intervention and
>|> >spending does more damage than the 'deficit'.
>|> 
>|> how does govt. spending on say freeways hurt the economy?
>|> 
>
>It all depends on whether the freeways were needed in the first
>place.  In Michigan there is a bridge called the Zilwaukee Bridge.
>Originally the bridge was a drawbridge.  Since the bridge was on
>I-75, it created enormous traffic backups when the bridge went up.
>For years a new, taller, bridge was planned to replace the old
>bridge.  Finally, the new bridge was built, costing millions of
>dollars and costing far more than original estimates.  Of course
>there was one additional hitch.  The need for the bridge was
>eliminated a few years before it was built because a bypass was
>built which avoided the bridge.  For the cost of a sign telling
>drivers to use the bypass (which didn't add much at all to the
>distance or speed of travel), the costs associated with the
>bridge could have been avoided.  While it is true that the 
>construction created 'jobs', the money used to create an unnecessary
>good could have been spent on other items that were more desireable.
>As a result, our standard of living was hurt.  Building this
>bridge made about as much sense as hiring the workers to dig a
>big hole and fill it up again.  It was money wasted.
i am from MI, so am quite aware of that boondoggle. 

>
>I'm not saying that all government spending is wasted (although
>it wouldn't take much to convince me otherwise), however a
>significant portion *is* wasted and *is* unnecessary.  Farm
>price supports, guaranteed loans, etc. are all unnecssary.
>Let people keep more of their money so they can buy what
>they want, rather than hiring lobbyists to convince the government
>to take money from other people to give to the groups the
>lobbyists represent.
98% agreement!!  (some farm subsidies are important in commodities
with inelastic demand and volatile supplies.)
>
>|> >
>|> >|> 
>|> >|> >would make the economy worse, and would therefore result in lower
>|> >|> >tax revenues,
>|> >|>
>|> >|> non-sequitur!
>|> >|>
>|> >
>|> >How do you figure?  A smaller economy will generate less tax revenue
>|> >than a larger economy.  Raising taxes is not the way to stimulate
>|> >the economy.
>|> my misunderstanding.  you don't mean *relatively* worse, but absolutely
>|> worse.  in that case i disagree that "many of his [perot's] ideas" (=??) will
>|> result in negative GDP growth.  remember, the second largest tax increase
>|> in history (reagan's) didn't result in negative growth.
>|> 
>
>I do mean *relatively* worse.  I believe that Perot's programs will
>make the economy grow less than in the absence of his programs.  I
>also don't believe that the 'problem' warrants the solution he is
>proposing, even if it did work.  This is not to say that I disagree
>with all of his proposals.  I don't remember specifics, but I 
>recently read an article detailing some of his ideas, some of
>which I agree with.
OK, we have overcome our semantic differences and again are in 
agreement.  

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