Saturday, October 22, 2005

Where I start to disagree

I generally agree with a log of what the Skeptical Optimist says but I think he fails to recognize many one of the reasons why America has become a great country.

"Bottom line: If the economy grows at least a fast as the debt grows, and inflation is low and under control, our ability to make growing interest payments will increase at least as fast as our obligation to make those interest payments.

If we can sustain those conditions, our grandchildren will have much larger incomes than we do, but will have a debt burden that is no worse than ours. " [boldness added by me]

I understand what he is saying perfectly. Though, I do have an addendum that he failed to add. (He could also feel this way, but since he did not state his opinion on this topic, so for this post's sake I will assume he feels differently.)

Just because the share of our children's debt will be no worse than ours does not take away our responsibility to pay down the debt, if possible (You can't really pay for bonds that are already out there, only sell less. Sell one to two percent less in dollar amount per year adjusted for inflation and indexed to the national income, that should do the trick.). Many Americans work hard to make their children's lives better not "no worse". I am not opposed to national debt. It serves it purposes. Though, I greatly favor less debt (both numerically and as a percentage of GDP). I really don't see the reason why running the countries finances should be any different than running my finances or a large companies finances.

I really don't have a problem with the debt that comes from bonds because new bonds will be sold to pay for the olds ones, but I do have a problem with the debt that comes from budget overruns and similar issues. That is comparable to me racking up spending on my credit card as far as I am concerned.

cube

7 comments:

Dave Justus said...

Debt is only one side. If increase taxes or decreased spending hurts our economy more than it reduced the debt (slower growth) then the reduced debt will end up being a larger percentage than it would have been otherwise, even though we sold less debt.

As an extreme example, we could cut military spending to nothing and reduce debt very quickly from that. Even if that didn't cause someone to invade us, we can easily imagine that massive instability in the middle east and/or unsafe waterways on the world oceans could dramatically harm our economy. Education is the same.

Spending should be evaluated based upon whether allocating those resources is a good investment or not, regardless of whether it increases the debt or not. We should cut spending that isn't a good investment or necessary. There is of course widespread disagreement on what is good and bad, but the debt really shouldn't play into that.

The real issue is how much we spend, not how we finance it (taxes or debt.) Government spending is, at it's core, reallocation of private sector production into government production. How much we want to reallocate in total (deficit + taxes) and whether that reallocation is a net benefit or a net detriment is the basis making this determination.

National finances are different then personal or corporate finances. The biggest difference is that a country can literally 'print money.' How much that is printed is controlled by the need to combat inflation and deflation. Deficit spending is a useful tool in doing that.

William Thrash said...

I think many politicians don't want to mention the obvious:

The deficit and debt will "go away" by itself (as long as spending is controlled).

How? Why?

The big nation-busting senior citizen bubble from the baby boom retiring is supposed to wipe out the government and break us.

Of course, what they're not saying is that those retirees (67 is the age now? Or older?) wojn't live very long.

When that bubble dies out (and quickly with all the diabetes and alzheimers rampant and growing) you will suddenly have so much money from SS taxes that the deficit will vape and the debt could be paid off.

I say "could," only because trusting a politician with unspent money is like the trusting the ACLU not to defend the right of a child molester to be a day-care provider.

If we could only get fiscal conservatives into office...

Cubicle said...

Dave,

"Debt is only one side. If increase taxes or decreased spending hurts our economy more than it reduced the debt ...even though we sold less debt."

I would agree with that Though I also belive that the goverment should implent pro growth polices (whatever those might be), but I don't think the goverment should spend to help out the econmy.

"Spending should be evaluated based upon whether allocating those resources is a good investment or not, regardless of whether it increases the debt or not."

That is where i disagree. Even though it is a good investment for me to buy a house, I cannot afford it. Just because somthing is a good investment, you should not go broke investing you cash.

"The real issue is how much we spend, not how we finance it (taxes or debt.) "

I would disagree. I would consider the issue both how much we spend and how we finance. Both must be well managed.

"National finances are different then personal or corporate finances. The biggest difference is that a country can literally 'print money.'"

Yes the goverment could print money, but they should not print money to buy theirselves out of debt, that is cheating and probably does more damage than it fixes.

"Deficit spending is a useful tool in doing that."

I am not sure how deficit spending is realated to controlling inflation, i might have to do some research into that. any links would be appericated

Dave Justus said...

Here is a link to a post I made with a links to a couple of papers from the most extreme deficits don't matter school.

Takes a bit to understand them, and more to grasp what they mean if they are right.

I am not totally convinced by this presentation, but pretty sure it is a valid way of looking at money and federal economics.

In a sense, all money is initially created by deficit spending, and in a growing economy, the only way supply money to the economy is to spend more than is collected. If you don't, you get deflation.

Read the articles and let me know what you think. I'm still trying to grasp the concept myself.

Cubicle said...

dave,

have not read the articles yet, but i would like to respond to this point.

"In a sense, all money is initially created by deficit spending, and in a growing economy, the only way supply money to the economy is to spend more than is collected. If you don't, you get deflation."

No so, another method of "creating money" is to pay the intrest on goverment bonds to people with newly printed money instead of tax recipts. That will also have the effect of creating money (though maybe not at the pace neccesary to feed the growth, though that pace can be adjusted though the fed rasing or lowing intrest rates.)

NOTE: I am under the impression that most money is created this way, even if that money is created electronically in the local banks.

Dave Justus said...

Paying interest on bonds is part of government spending. Part of the deficit if you will.

This of course has, as you rightly point out, nothing to do with printing actual physical bills.

Sandcastle said...

Or we could just demand ransom from the rest of the world in order to not randomly launch nuclear attacks. Especially if we get that missle defense thing to work.