[GJM] Do Government Deficits Matter?

[W. Curtiss Priest]

William F Hummel wrote (on Understanding Money):
> 
> Steve,
> 
> You placed quotation marks around "debt burden" which suggests that
> you question whether government debt is in fact a burden.  I fully
> agree.
...

Dear Bill,

I am sure you realize that your reply glosses over many
issues.  Some:

	1.  Federal Debt/GDP is dwarfed by the massive
	level of Federal Liabilities and Obligations

	Some have put the total sum up around $60 trillion,
	or 6 times GDP

	2.  You address the economy from a static model.  So,
	for example, I would say that the boom after WWII
	occured "despite" the high debt/GDP ratio.  I thumbed
	a 1952 issue of the Saturday Evening Post.  Not only
	was it clear that deficit spending during the war
	opened many new markets based on technologies and an
	expanded world presence, but, "because we won" -- there
	was a "can do" euphoria that pervades that magazine.

	How does the static model embody these forces?

	In describing the race between the needs of the
	retiring baby boomers and productivity, you hint
	at a more dynamic model.

	3.  And, this current US GDP?  Recall the well known
	microeconomics of when a factory "comes to town."

	The local economy flourishes at a great pace as
	the dollars produced by wages become a seven times
	multiplier when the money goes into services, etc.,
	and comes around again and again.

	Now, take the way in which trillions of dollars have
	"come to town" by the leveraging of borrowing as
	home equity.  While the actual borrowing against
	(supposed) increased "home values" has only been
	less than a trillion, look to the multiplier!  All
	those expansions needed everything from grass to
	washing machines.  Commodity prices have gone
	through the roof on everything from lumber to copper.

	So, when you look at the GDP denominator, you have
	a very precarious number.  And, straight Federal
	borrowing (per comment #1) and in contrast to
	the multiplied effect of consumer borrowing makes
	the actual federal debt less important.  Yes, bombing
	and rebuilding Iraq has a multiplier as defense
	contractors also produce hires, but, as the work
	occurs "over there" -- the ripple effect is far
	less.  And, today, the military is no longer an
	innovative force in the economy.  The Arpa/Darpa
	days are over.  The military now looks to private
	corporations to provide, say, for communications needs.

	And, these very same corporations have dramatically
	cut R&D expenditures to bolster current profits.

So, let's look at this from the other end of the
telescope.  Let's say that this country's actual GDP, once
the consumer/household debt and multiplier effect is pulled out is
really only $2 trillion.

And, let's say that because of the tumult of Federal
obligations and liabilities on everything from the Pension Guarantee
Corporation to FDIC to S.S., we will actually need come up
with $60 trillion, tomorrow.

This gives us an effective federal debt/GDP ratio of 30 times,
and at a time where the "corporate mood" of this country is
negative.  This makes the apré-WWII ratio of 1.2 look
like a bargain.  And it was.

Regards,

Curtiss

["fair use," "teachable moment," "archival," Section 107(a), 1976
Copyright Act and 1998 Digital Millennium Act]

Subject: Re: Do Government Deficits Matter? Date: Mon, 16 Oct 2006
18:39:52 -0700 From: William F Hummel <wfhummel at comcast.net>
Reply-To: UnderstandingMoney at googlegroups.com To: 
UnderstandingMoney at googlegroups.com References: 1 , 2

Steve,

You placed quotation marks around "debt burden" which suggests that
you question whether government debt is in fact a burden. I fully
agree. It could be a burden if it were like personal debt, which can
become too large to service out of income. But the US government is
not analogous to a consumer who needs feeding and housing. As
economist Herb Stein said, "The government is no one. There is nobody
here but us people." Government spending is entirely directed toward
providing services to the people. The important issue is whether its
spending is beneficial or wasteful. Unfortunately we have had an
enormous amount of wasteful spending in recent years. 

The debt/GDP ratio is widely used by economists as some sort of
indicator, but it is not at all clear what the significance of that
indicator is. If there is some upper limit that creates a problem for
the economy, we haven't experienced it yet. After WW2 it reached an
all time peak of about 1.10, and thereafter we had twenty years of the
best economic growth in our history. By 1974 it had dropped to about
0.24, and we had a long period stagflation. As you noted, today it is
only about 0.4 in spite of the large budget deficits. The current
debt/GDP ratio in Japan is about 1.30, and they appear headed toward a
very strong period of growth after a decade of stagnation.

Interest paid on the debt and the taxes to cover those payments
represent a balanced reciprocal flow of funds between the government
and the private sector. Interest payments, like any other government
spending, cause a redistribution of financial wealth from tax payers
to the recipients of the spending. There are obvious inequities, but
the redistribution is broadly toward lower incomes because of the
progressive nature of our income tax system. And interest payments do
not consume resources (labor and capital), so they are not subject to
the sort of waste that other spending is.

It's worth noting that the net financial wealth in dollar-denominated
assets of the private sector (both domestic and foreign) is equal to
the total Treasury securities outstanding, including those held by the
Fed as well as the public. The only Federal debt worth considering is
that which pays interest to the private sector, namely bills, notes,
and bonds. Intragovernment debt (trust funds) is basically a fiction
and can be disregarded in the big picture. 

We may have a substantial growth in the debt/GDP ratio as the baby
boomers draw benefits, but that is a financial wealth distribution
problem rather than a resource problem. The notion that the government
can accumulate dollars to be paid out later is also a fiction. If
there is a real problem as the boomers retire, it will hinge on
whether the productivity of the private sector grows fast enough to
provide the goods and services needed in the economy with fewer
workers relative to retirees.

William


-- 


	   W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB at MIT.EDU http://Cybertrails.org