From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: What happens when USA goes bust?
Date: Fri, 16 Oct 1992 14:56:45 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <1992Oct15.224509.6473@oakhill.sps.mot.com> pjm@anegada.sps.mot.com (Patrick J. McGuinness) writes:
>In article <Bw4qCz.MK@apollo.hp.com> nelson_p@apollo.hp.com (Peter Nelson) writes:
>>In article <1992Oct14.185636.18315@oakhill.sps.mot.com> pjm@anegada.sps.mot.com (Patrick J. McGuinness) writes:
>>  However if you reduce government spending by 20% then you're 
>>  looking at a $280 billion reduction during that time.  This
>>  is about 7 million jobs (not counting multipliers).  Even if
>>  these are distributed over 5 years, how will the economy be
>>  able to absorb them plus normal growth in the workforce and
>>  grow at all?   Your numbers just don't add up.
>
>The problem I see is that we have a different model here.
>If Government spending is reduced, it reduces the demand for
>new borrowing. This in turn allows for lower interest rates
>and funds for more private sector borrowing.

 But you, yourself, said that data from the 1980's does not suggest
 that the deficit drove up interest rates much.  Moreover the total
 failure of monetary policy -- how many (13?, 15?, 15?) straight 
 Fed cuts -- to stimulate the economy has convinced most economists
 that lower interest rates are not the solution.  And it's true that 
 today we have the lowest interest rates in 25-30 years DESPITE a 
 massive budget deficit, so clearly this is not the issue.


>So even with spending reductions, we could get 3% growth.

 *Again*, I'd like to see the numbers.


>Because you suggested that the *only* way to reduce the deficit was
>via 10% unemployment. This is not true. We can do it
>another way: Gradually grow out of the deficit by cutting
>(or at least restraining) spending and engaging in pro-growth
>policies to increase tax revenues (not tax increases). 

  *AGAIN* let's see the numbers!   The problem, as I mentioned,
  with a slow approach is that the national debt continues to grow 
  at an alarming rate which forces an ever greater portion of tax
  money to be applied to debt financing, which further constrains
  our ability to make cuts -- i.e., an ever smaller % of the budget
  is available to be cut, so the cuts have to be even deeper.


>1. Don Gibson in e-mail pointed out that a significant chunk of
>the deficit is temporary - recession and S&L related funding.

  I STRONGLY doubt that recession funding is "temporary" -- as
  I said, I anticipate double-digit unemployment this decade.
  Nor is it clear that the S&L bailout is -- an article earlier
  this week in (I think) the Wall Street Journal pointed out how
  house prices in California are plummeting along with their
  declining economy and how this will likely trigger a new round
  of bank failures.  It added that California's economy is so big
  (if it were a country it would have the 13th largest economy 
  in the world) that this will ripple through the whole economy.


>2. If the Fed Reserve is serious about tying the dollar to a basket
>of commodities,

   This would require international cooperation -- again an optimistic
   assumption given the recent failures of GATT and EMR.

> as seems to be the case, we can look into gold-backed bonds for part
> of the Government debt. This will help lower interest rate costs.

   It's not clear that it would have any effect on interest rates, 
   but again, very few major economists any longer think that
   interest rates are an issue.



---peter







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