From: mccall@mksol.dseg.ti.com (fred j mccall 575-3539)
Newsgroups: alt.politics.elections,talk.politics.misc,tx.politics
Subject: Re: The end of the Reagan Era
Date: 5 Nov 92 14:09:02 GMT
Distribution: usa
Organization: Texas Instruments Inc

In <lt-=D!C@engin.umich.edu> jwh@citi.umich.edu (Jim Howe) writes:

>In article <1992Nov3.141621.22028@mksol.dseg.ti.com>, mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
>|> In <KM-=FA#@engin.umich.edu> jwh@citi.umich.edu (Jim Howe) writes:
>|> 
>|> >In article <1992Oct31.223142.21346@europa.lonestar.org>, tom@europa.lonestar.org (Tom Kimball) writes:
>|> 
>|> >There is a theory called Ricardian Equivalence which
>|> >posulates that revenue raised from debt is roughly equivalent to money
>|> >raised in taxes.  While I don't necessarily think the equivalance is
>|> >100%, I do believe that it is erroneous to believe that a $1 of debt is
>|> >bad and a $1 of tax is good.  Either way the government is sucking a
>|> >dollar out of the private economy.  Either way some level of 'crowding
>|> >out' will occur.  The solution is not to change the mechanism by
>|> >which we suck the private economy dry, the solution is to reduce the
>|> >amount of sucking.
>|> 
>|> A dollar of debt is MUCH worse for the economy (assuming a reasonably
>|> healthy economy with a reasonable demand for capital -- which we don't
>|> have right now).
>|> 

>How is it MUCH worse?  If there is a reasonable demand for capital, the
>increased demand by government can push up interest rates.  However, if
>government taxes more, the governments demand for capital decreases
>but the pool of available credit also decreases because people have less
>money to save and invest because they are now paying higher taxes.
>In one case, increased demand drives up rates, in the other reduced
>supply drives up rates.  Between the two, debt may cause more crowding
>out but both are bad.

But you cannot ignore the cost of money that must be paid for the
borrowed funds.  Hence, not only are borrowing and taxing equally bad
at the moment they occur, but in the borrowing case there must be
subsequent taxation to pay the debt and the cost of the money.
Overall, that looks more than twice as bad to me.  It's as if they are
taxing twice, plus interest.

>|> >|> 
>|> >|> As I've said before, if Reagan had cut spending at the same time he cut
>|> >|> taxes, things might have worked out great.  But you don't have to think 
>|> >|> very hard to realize that:
>|> >|> 
>|> >|> A 1$ tax cut
>|> >|> 
>|> >|> 	is equal to
>|> >|> 
>|> >|> A $1 dollar increase in the national debt
>|> >|> 
>|> >|> 	which is equal to
>|> >|> 
>|> >|> A $2-$10 mandatory future tax increase.
>|> >|> 
>|> 
>|> >How do you figure?  A $1 increase in the national debt will have
>|> >to be repaid in the future.  What is the present value of the
>|> >$1 at the time it is repaid?  Inflation erodes the debt.  In addition,
>|> >it is preferable to have a $1 now than a $1 in the future.  The
>|> >payback in the future is nowhere near $2-$10.  I don't think that
>|> >government bonds pay rates > 100%.
>|> 
>|> He didn't say 'next year'.  He said 'future'.  How much does a Savings
>|> Bond cost and what is the face value?  It is indeed a $2:$1 payback
>|> 'in the future'.
>|> 

>But what is that $2-10 worth in the future.  If I give away $1 now
>and receive $2 in the future, that $2 is not the same as receiving
>$2 today.  It sounds scary to say that the future tax increase
>is $2-10, but what is the present value of that increase?

Yes, but future value of money is an 'iffy' thing.  For example,
interest on Savings Bonds is not allowed to fall below 6% BY LAW.
Assuming they don't change the law, if interest rates stay low the
future cost of that money turns out to be unreasonably high.

-- 
"Insisting on perfect safety is for people who don't have the balls to live
 in the real world."   -- Mary Shafer, NASA Ames Dryden
------------------------------------------------------------------------------
Fred.McCall@dseg.ti.com - I don't speak for others and they don't speak for me.
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