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National Debt and Deficit Spending

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DarkWaters

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Well, the most obvious reply is that the government should cut spending.

De-regulation of industries is important too, as this would "grow the economy", thus making government spending relatively lower.

I agree but this seems to concern deficit spending as opposed to the national debt itself. Of course, it is important to mention since reducing government spending is the first step. I am more curious about the question:

Suppose that our government has significantly reduced its relative spending through either fiscal discipline or economic growth. Given that our government is projected to have another budget surplus that is about, for the sake of argument .3% of the national debt, what should be done concerning the national debt?

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It seems that any deficit spending our government engages in today will lead to more taxes that must be paid tomorrow.

That's not quite correct. About 50% of the debt is "owed" to the the national, state, and local governments, which is another way of saying that it's simply inflated the currency. 100% of the debt is money used to divert private resources to governmental uses NOW, not some time in the future. Paying off and paying interest on the debt mostly redistributes wealth from poor people who don't invest to those who lend the government money.

Edited by GreedyCapitalist
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On a related note, should government properly be allowed to borrow money?

A proper government, which is funded by voluntary donations, can borrow money from any investor who trusts that the government will be able to repay it from voluntary donations, and is willing to incur the risk of losing his investment if the government doesn't receive enough donations. So this is more like a venture capital investment and not like the Treasury Bonds we have now that are considered to be the least risky of all dollar-denominated securities. Loans secured by real estate that the government owns or by pledges of future donations would still be pretty safe, but they would in all probability be much rarer than government bonds are today.

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On a related note, should government properly be allowed to borrow money? Seems kinda like my grandfather taking out a loan and me having to repay it. I am not real comfortable with that notion. Sounds like wealth redistribution.

There are several issues here.

Debt as an instrument of financing, even for a government, is not bad, per se. Especially if there are immediate financial needs that a proper government must face - such as financing a war.

As a policy carrying long term debt I think is acceptable as long as the debt level is very low relative to GDP (1-2%). THese represent easily payable liabilities should the absolute worst happen.

What I think is extremely dangerous is the current conservative's argument, where they compare a government to a corporate balance sheet using GDP as revenue, and then use corporate debt to equity ratios as comparables to justify increasing govt long term debt levels.

Why, because of the behavior it creates in government. This is analogous to the Laffer curve agument for tax decreases,arguing that a decrease in tax rates will increase tax revenue (until you reach some optimum). It is a policy that allows government expansion, concurrent with deregulation and subsequent expansion of the economy.

The debt to equity comparable level argument for long term debt levels acts the same way. If government deregulates, economy gets stronger, GDP grows. Then I can have a massive cash inflow due to increase in debt financing to come back to the comparable levels of debt to equity.

So while increasing taxation provides leftists with their statist resource pool to expand government, these arguments provide rightists with similar resource pools to expand government just as they claim they are for smaller government.

However, relatively speaking, even comparables debt levels still allows for "payable" debt. The comparables argument probably won't get you into a position where you can't realistically pay down the debt.

Far more destructive are "off balance sheet liabilities" such as social security, and medicare which promise future cash outflows with no corresponding liability accounting today, and which can easily swamp our ability to pay them off. These are the ones that really mortgage your kids.

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DarkWaters, I think there is some assumption you are making but not stating, when you ask: "Suppose that our government has significantly reduced its relative spending ... to have another budget surplus ...what should be done concerning the national debt?"

The general answer is: pay it off. If spending can be reduced, the debt can be made off.

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However, relatively speaking, even comparables debt levels still allows for "payable" debt.

Good post Kendall. However, I suspect that I do not understand the above sentence. Could you please provide some examples of what you consider a "payable" debt versus an "unpayable" debt? Is the differentiation solely in the liability amount? What specifically does "comparable debt levels" refer to?

Far more destructive are "off balance sheet liabilities" such as social security, and medicare which promise future cash outflows with no corresponding liability accounting today, and which can easily swamp our ability to pay them off. These are the ones that really mortgage your kids.

Some free market economists would call these "off balance sheet liabilities" a Ponzi scheme.

DarkWaters, I think there is some assumption you are making but not stating, when you ask: "Suppose that our government has significantly reduced its relative spending ... to have another budget surplus ...what should be done concerning the national debt?"

This is probably true but I am afraid that I do not realize what assumption I may be making that you are referring to. Could you please elaborate? Thanks!

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Could you please elaborate?
The solution to the debt is to get rid of it. Normally, one would do so by paying it off. However, since this sounds too "obvious", I assume you're thinking of some objection. For instance: would we need to raise taxes to pay off the debt? or, isn't that unfair to pay off the debt from forced taxation? or, isn't the debt too huge to pay off? etc.

Assuming that one would change the system gradually, it would be best to reduce spending faster than taxation, using the difference to build a rainy-day fund and to pay off the debt.

As has been said, a Capitalist country could take on debt. In general one would like to see a government that worked within its budget, using some for current expenses and some for asset purchases. One would also like to see a government that has built up a small rainy-day fund for a sudden war that might be required.

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Good post Kendall. However, I suspect that I do not understand the above sentence. Could you please provide some examples of what you consider a "payable" debt versus an "unpayable" debt? Is the differentiation solely in the liability amount? What specifically does "comparable debt levels" refer to?

Sorry about that. I realized after I wrote it was a crap sentence. As long as you have some mechanism that ties debt levels to the productive capacity of the country, and it is reasonable in size, then it should be payable. This is the debatably good part of the conservatives argument. GDP -> tax revenue -> debt levels. It's at least tied in. Now, there is still the problem of what exact levels to set (10%, 20%, 30%), but at least there is a mechanism to debate it. This is analogous to the bank looking at your income before they give you a mortage.

In the corporate world, debt to equity percentages vary by industry because each industry yeilds a different servicable debt level. There is a structural reason in reality that pharmaceutical and high tech companies have lower debt, and chemical companies have higher debt levels It has to do with the potential volatility in earnings (among other things). Part of deciding how much debt you might take on is to look at "comparable" companies, and see what they historically have been able to service. Rightist use this sort of argument by pointing at Industry and saying "well, industry runs an at average debt level of 25% of assets, The US govt is only at 5% of gdp so we're fine." It's not really a valid comparison.

Some free market economists would call these "off balance sheet liabilities" a Ponzi scheme.

I totally agree. Ponzi schemes are nothing more than a class of hidden liabilities.

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  • 2 years later...

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