From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: All deficits are not created equal.
Date: Mon, 5 Oct 1992 18:49:16 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <1992Oct5.165241.850@aio.jsc.nasa.gov> walker@superboy.jsc.nasa.gov writes:
>In article <Hp3-g8B@engin.umich.edu>, jwh@citi.umich.edu (Jim Howe) writes:
>|> 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:
>|> 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.
>
>    WRONG!  WRONG!  WRONG!
>
>    GNP is not the governments income.  Governments income comes from
>    taxes, tarrifs and the like.  Unless of course you find a 100% tax
>    rate acceptable.

  That wasn't his point (I don't think).   Tax revenues *are* nominally
  related to GNP.  So a bigger GNP means a bigger revenue stream, and 
  therefore allows you to afford a bigger government.   (Whether this 
  is desirable is orthogonal to the discussion)


>|>                       Our debt/GNP percentage is not historically
>|> out of line either.

  Yes it is.  We were only this high once before and that was at the 
  end of WWII, up to the Eisenhower administration, or so.   The
  difference is that at that time the rest of the world was
  rebuilding after the war and US industrial infrastructure was
  intact: able to supply a rebuilding world with all the ships
  and tools and radios and trucks and tractors and planes and
  steel, and so forth that it could use.  It was a booming time
  for the US not likely to ever be repeated -- we could literally
  grow our way out of the debt.  There's little likelihood of that
  today.


>|>                                                         Another
>|> thing to remember about debt is that inflation erodes it. 

  And currently we have a CPI inflation rate of about 3.5%, and an
  article two weeks ago in the Wall Street Journal suggested it 
  may really be lower than that, possibly close to 0.


>	It is NOT the debt that is the problem it is the rate of growth
>	of the debt (deficit).
>
>	Again this is not our problem but it will be our childrens
>	problem.

  It may well be our problem to the extent that Treasury refinancing
  crowds out other demands for capital.  Or to the extent that it
  prevents the US from being able to use traditionally successful
  fiscal expansion policies in recessionary years.  Or to the extent
  it makes the dollar so weak that doing overseas business becomes
  prohibitivley expensive for US companies: sure, it makes US-made
  products cheaper, but most modern industrial products are assembled
  from parts made all over the world, and of course sales and marketing
  costs have to be paid in the country where the goods are sold, so
  a weak dollar is a double-edged sword for US companies.   Or to the 
  extent that the realization that the debt has to be paid off *some-
  time* keeps long-term interest rates high (as they are).  

  There's no question in my mind that the deficit must be eliminated
  and the debt reduced in the next several years because they are a 
  drag on the current economy.  Also, I'm no kid, but I certainly
  plan on being around for 4 or 5 more decades and there's no question
  that the debt monster will crush us before then if we don't kill
  it.

  On the other hand, as I've said, eliminating the deficit will
  cost millions of jobs and raise the unemployment rate into the 
  double digits: the numbers just don't come out any other way.  
  I think this is why Bush&Clinton are unwilling to commit to
  it, and Perot is being dishonest by not telling his supporters
  just how bad things will be.  His supporters still seem to think
  that if we all just "tighten our belts" we'll get through this.

  Think of it like chemotherapy for cancer: without the chemo' the
  cancer will kill you, but the chemo' itself will *nearly* kill
  you and make you wish you were dead.  Perot is like a doctor 
  telling the cancer patient that the chemo' will just involve a
  mild headache.   Bush and Clinton are like doctors saying "let's
  wait a little and maybe it will go away on its own, or maybe
  we'll discover a new, better treatment".   In my book all three
  such doctors would be quacks.



>|>                                              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).                                        

  Cutting spending is the only way to go since it has NEVER occured that
  a tax increase has been applied soley to deficit reduction, and never
  since I've been old enough to vote has a tax increase not been followed
  by a BIGGER spending increase.

  But let's not kid ourselves: ANY serious attempt to cut the deficit will
  send the economy into a depression because the economy is artificially
  inflated by the  size of the deficit.   It doesn't matter whether you
  take the $390 billion out in taxes or cuts -- it still comes out of
  the economy and the effect will ripple through the whole thing landing
  millions in Hoovervilles (Bushvilles, Clintonvilles, Perotvilles?) or
  on the streetcorner selling apples.

---peter








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