From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: All deficits are not created equal.
Date: Tue, 06 Oct 92 09:50:35 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

In article <BvnwA4.MHK@apollo.hp.com>, nelson_p@apollo.hp.com (Peter Nelson) writes:
|> 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)
|> 

Your assessment of my point is correct.

|> 
|> >|>                       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.

Wasn't the period from 1983 to 1989 considered to be the largest
peacetime expansion of the economy?  Real GNP expanded by 30%.
Tax revenues also rose significantly.  I think it is completely
feasible to "grow" our way out of the deficit.  As to the current
level of debt, I'm not too concerned about it.  If we can reduce
the amount we add to it I think things will be fine.

|> 
|> 
|> >|>                                                         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.
|> 

No disagreement here.  Most of the deficit is adding to the real
debt of the nation.  It's just a point to keep in mind.

|> 
|> >	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

However this has not shown to be a problem.  Up until now, at least,
there has been plenty of capital available in the world to invest
in U.S. government obligations without seriously impacting interest
rates.  As for crowding out, why would borrowing $X billion have any
more impact on the economy than taxing $X billion.  Taxing takes
away money which could have gone for expenditures and investment,
and it primarily comes from U.S. citizens.  Bonds, otoh, can be
purchased by anyone in the world.  I'm not saying that borrowing
in large quantities won't have a detrimental effect on the economy,
I'm just saying that excess taxation will have a similar detrimental
effect.  The solution is to reduce both spending *and* taxes so
the money can be freed up for more productive investment.

|>
|>   [...] 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).  

Long term interest rates remain high mostly due to fears of future
inflation.  Rates are declining as people realize that inflation
(hopefully) won't be increasing greatly anytime soon.  As to paying
off the debt, it never has to be paid off.  Debt will be retired
and new debt will be added.  Assuming that the U.S. government isn't
going to one day go out of business, the debt will simply be rolled
over.  Revenues from new purchases will help pay the principal and
interest on old purchases.

|> 
|>   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.
|> 

I'm not convinced that it is the deficit or debt that is the drag
on the economy.  I'm more inclined to believe that excess government
intervention, spending, regulations, etc. are to blame.  Spending
needs to be decreased not because we have a deficit, but because
people should be allowed to keep more of their own earnings.  I
also believe that we have gone overboard on banking rules and
S&L cleanup, such that bankers are paranoid about making any form
of risky investment.  The junk bond market, for example has collapsed,
partly due to market correction, but also due to the S&L cleanup.
Junk bonds may have been misused by some, but they were a valid
financing mechanism for smaller companies.  An interesting data
point, since the collapse of the junk bond market in 1989, there
has been no new (net) job creation.

|
|>   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.

I agree.  A 'quick fix' solution to the deficit 'problem' will cause
economic turmoil.  I believe we need to gradually reduce the size
of government and reduce taxes as well.  The cure for the deficit
disease is worse than the malady.

|> 
|> >|>                                              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.
|> 

I agree completely.  Raising taxes will not fix the deficit, it won't
even reduce it.  Government consistenly spends $1.50 for every additional
$1 it receives in revenue.

|>   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.

Cutting spending will cause a restructuring in the economy.  If done
dramitically, their will be great short term suffering.  I don't
believe the 'problem' warrants such a drastic solution.  I believe
that government spending should be reduced in real terms, but it
should occur gradually.  It took us years to get where we are and
it will take some years to recover from the damage.  More taxes
and more government are not the answer to our current problems.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
Newsgroups: talk.politics.misc,talk.abortion,alt.activism.d