(no subject)

[yesthattom]

At $8 trillion now, our National Debt – accumulated since 1776 – will have reached $10 trillion or so by the time President Bush leaves office. Of this, roughly $8 trillion will have been racked up under just three presidents: Ronald Reagan, George Bush, and George Bush.

In the fiscal year just ending this month, taxpayers will have paid roughly $350 billion in interest on the debt.

(from Andrew Tobia’s blog)

If we weren’t spending that money on interest, we could be spending it on Katrina relief, education, and a host of other things.

I remember in 1992 one of the Clinton/Bush debates has “real people” asking questions. One person asked Clinton why she should care about the national debt. Clinton’s eyes lit up and he gave this very touching, thoughtful explanation of how the national debt affects people directly. He said that because we’re paying all this interest on the national debt, there is less money to pay for schools, to repave the roads where you live, and so on.

At the time everyone just blathered about, “Oh look! A democrat pretending to care about the national debt!”

Then when he was president he changed the way we do taxes to be more fair AND eliminated the deficit. The first time a president had actually done something positive about the national debt in ages and it was a Democrat. The Republicans were furious and successfully distracted people by saying, “Oh, but we’ll be repaying the debt for years, there’s still debt to pay off even if we aren’t adding to it” and “oh, he lucked out because of the good economy” and “oh, it only passed by 1 vote”.

The first thing Bush did was undo the tax changes Clinton had made. Removing the fairness and expanding the debt. And the economy sucks while Haliburton gets richer.

Now I realize what an economic genius Clinton was. He had a compassionate tax plan that was more fair to more people and solved real economic problems.

Comments

[wotw]

Tom. You are just mistaken here. This is not a matter
of ideology; it's a matter of arithmetic.

The alternative to paying interest on the national debt
is paying off the debt. If we pay off the debt, we
raise your taxes. If we raise your taxes, we lower your
bank balance. If we lower your bank balance, you stop
*earning* interest. That cost to you completely offsets
the value to you of eliminating the debt payments.

I am no happier than you are about Bush's reckless
spending. But it is a myth to say that the spending is
costlier when paid for by debt than when it is paid for
by taxes.

Paying off the debt would lower your share of the
national interest payments, but would simultaneously
lower the interest you earn on your (now tax-depleted)
investments. To a first approximation, no gain. To
a better approximation, you'd probably be worse off
because your investments probably earn a higher rate
than the govt is paying.

And it's no use arguing that you're poor and have no
bank balance anyway; in that case you're paying very
little in taxes and are off the hook for the debt
payments also.

This is a very simple point, quite entirely
uncontroversial among economists, and amazingly little
understood by the intelligent general public. But it's
worth getting it right.

[yesthattom.livejournal.com]

Ah but you forget that he lowered MY taxes and raised yours (maybe, I don't know your income).

The change he made was to raise taxes on the top 2% and lower it on the middle. He didn't lower it enough to make it a break-even... the government had more money in the end but the richest we're paying for it. He also put into place a rule that Congress can't start a new program without cutting another or raising a tax to pay for it (Bush got rid of that rule). Lastly, by putting more money in the pockets of the middle class, they bought more stuff and that fueled the economy that made it grow.

Its the economic package that is more ethical under the beliefs of the Christian left and amazingly enough it made for a better economics.

[wotw]

You are mangling a whole lot of issues together. The
question on the table is: "Are interest payments on the
public debt costly to taxpayers?". Other questions about
the structure of the tax code are tangential to this.

The answer to the question is: "No. Interest payments on the
public debt are not costly to taxpayers. The reason for
this is that in exchange for those interest payments, tax
payers get to keep their money in their own bank accounts
longer, thereby earning additional interest that offsets
the payments on the public debt."

No economist---and more to the point, nobody who understands
the basic issues---would ever characterize interest on the
public debt as a net cost.

[yesthattom.livejournal.com]

While I appreciate your economic analysis (it is very enlightening) you have to remember that this is a political issue as well. Your attempts to eliminate the political side of this robs the debate of meaning. In fact, it lets you become a pawn of people that you don't support.

Politically...

Republicans keep claiming to be the ballanced budget guys, but in the last 50 years only a Democrat has done that.

Republicans keep claiming to be the fiscal responsibility guys, but its the Democrats that have enacted house spending rules that require responsibility and Republicans that have lifted such rules.

The truth is that Republicans don't want to ballance the budget. They just want an excuse to cut the programs they don't like. By constantly screaming "smaller government" people ignore the fact that they are growing total government spending because they make a big deal about the cutting that they actually do accomplish, which also happens to cut the things that directly hurt me and my friends.

The truth is that Democrats want a ballanced budget because without a ballanced budget there's always an excuse to cut funding for social justice. In Vermont they maintained a ballanced budget while giving healthcare to all children and unemployed adults, at a cheaper rate than if they had outsourced it to industry.

When you make a statement like, "Other questions about the structure of the tax code are tangential to this." you are losing sight of the Christian ethics that Adam Smith felt were the bedrock of ethical capitolism: Jesus' teachings about concern for the poor and the wellbeing of all man. These things are the bedrock of the social contract we have lost in the last few decades. What's left is moral-less, valueless, race-to-the-bottom, vindictive capitolism.

What really pisses off Republicans and Libertarians (and libertarians) is that Clinton was right.

[wotw]

When you make a statement like, "Other questions about the structure of the tax code are tangential to this." you are losing sight of the Christian ethics that Adam Smith felt were the bedrock of ethical capitolism: Jesus' teachings about concern for the poor and the wellbeing of all man. These things are the bedrock of the social contract we have lost in the last few decades. What's left is moral-less, valueless, race-to-the-bottom, vindictive capitolism.


Which misses the point entirely.

The point is that decisions about spending are
entirely separate from decisions about how to finance
that spending.

Any argument you want to make about how much the government
should or should not spend on this or that program is quite
irrelevant to the question of whether the program should be
financed through taxes or deficits.

Spending is costly. Some spending is worth it; some isn't.
We can disagree vigorously (and I'm sure we do) about which
spending is worth it and which spending isn't.

But *given* the level of spending, it is neither more nor
less costly to finance it with deficits than to finance it
with taxes.

[yesthattom.livejournal.com]

First of all, it doesn't miss the point. This is my blog and if I say that issues are related then they are related. You can walk a mile in my shoes.

However since you are intent on saying this:

But *given* the level of spending, it is neither more nor less costly to finance it with deficits than to finance it with taxes.

I want to understand what you mean by that.

Am I not using the right word? I think what you are saying is that an Apple at the local QuickCheck costs 69 cents whether I pay for it or my friend pays for it, or if I take out a loan for it. That's how much I paid for it: 69 cents.

So what is the economic term for the impact it has on the future? If I pay $1 in interest over the next 3 years because I put it on my credit card, didn't it cost me $1.69? Or is there another economic term for that. It isn't more costly, it's just more ____. What's that word?

Or are you saying that whether the government pays 69 cents now or $1.69 over the long term it doesn't matter because the extra $1 is mitigated by higher interest rates that I get on my investments?

[wotw]

Let's stick to discussing the apple.

Suppose you've got ten dollars in your bank account and
the interest rate is 10%.

Option A is to put the apple on your credit card. The
apple costs a dollar. A year from now, your bank account
has $11 in it (because you've earned interest). A year
from now you've got to pay off the $1.10 on your credit
card (for the apple plus interest). That leaves you with
$9.90 in your bank account ($11 minus $1.10).

Option B is to pay for the apple up front. That reduces
your bank balance to $9. That $9 earns interest, and a
year from now you've got $9.90 in your bank account.

You are *equally rich* at the end regardless of whether you
put the apple on your credit card or pay for it upfront.

To answer your question:

So what is the economic term for the impact it has on the
future? If I pay $1 in interest over the next 3 years
because I put it on my credit card, didn't it cost me $1.69?
Or is there another economic term for that. It isn't more
costly, it's just more ____. What's that word?

There is no word because it's not more anything. The
long run effect on your bank balance is completely unchanged
by your decision to use the credit card.

Was it wise to buy the apple? Maybe, maybe not. But *given*
that you bought the apple, did using the credit card make
matters any better or worse? No. It made no difference to
anything, so there's no word for what difference it made.

N.b.: The above example makes the (admittedly unrealistic)
assumption that the interest rate on your credit card is
the same as the interest rate on your bank account. But
when we apply the same reasoning to government debt, the
assumption stops being unrealistic. If your "bank account"
consists of treasury bills, you *do* earn exactly the same
amount on your bank account as you pay in interest on the
federal debt. And you can always earn that interest rate if
you want to, simply by buying treasury bills.

Credit card rates are very high, making the reasoning about
the apple a bit unrealistic. But the govt borrows at rates
that are very low---and comparable to what you earn at the
bank. So there the example applies.

[yesthattom.livejournal.com]

Ok, now I understand what you are saying. For the government issuing t-bills, the costs are the same either way.

So if that's true, why don't we just spend spend spend? Because it has other impacts and implications. It those impacts and implications that we don't like, right?

So on one hand it doesn't matter that Clinton ballanced the budget but on the other hand it completely matters that he ballanced the budget.

Now I know why FDR wanted to hire an economic adviser with only one hand.

The point of the post that started all of this is that Clinton balanced the budget, did it ethically (helping the masses, not hurting them), and boosted the economy because the masses had more pocket money to spend. The fact that I may have used a term that isn't textbook perfect is about as important as when I go apeshit about people calling MS-DOS an "operating system" since any computer science textbook will tell you that MS-DOS isn't an operating system, it is a program loader. Sadly, the Software City catalog never had a "program loader" section. If you wanted to purchase MS-DOS, you found it in the "operating system" section.

Are you going to start reading Andrew Tobias' blog or what?

[wotw]

Go back to the apple example; it's easier to see the issues.

There are two questions you can ask about this apple.

1) Is buying the apple a good idea?

2) If I decide to buy the apple, should I put it on my
credit card?

I continue to claim that these are two separate questions
that can be addressed quite independently of each other.

When you talk about how much the government ought to spend,
and how much they have spent, and whether that spending is
wise, etc., you are asking, "Should the government buy the
apple?"

When you talk about the impact of interest payments on the
federal debt, you are asking, "If the government buys the
apple, should it put it on the credit card?"

The first question is a momentous question about policy. The
second question is of no significance whatsoever. It's
important not to get confused about that.

Your error was not an error of terminology. It was an
error of conception. Your real issues are how much the
government should spend, and what they should spend it on.
Those are important issues. You do yourself no service
by deflecting attention from those issues to the piddling
issue of whether the government should pay for its purchases
with debt.

[sierra-nevada.livejournal.com]

There is also a question of efficient/optimal allocation of capital. At any given moment, there is a finite amount of money. Who does a better job of spending/investing it? Consumers, Businesses, or Government?

[wotw]

If you have any evidence that government deficits affect
the allocation of capital, I'd like to see it.

[sierra-nevada.livejournal.com]

The more the government taxes, the less is available to business and consumers. That affects the distribution of capital. Q.E.D.

[wotw]

You *are* joking, right?

[wotw]

On the offchance that you're serious:

When the government buys a tennis racket and pays for it
with taxes, that tennis racket is unavailable to business
and consumers.

When the government buys a tennis racket and pays for it
with debt, that tennis racket is unavailable to business
and consumers.

Those events have exactly the same effect on the
distribution of tennis rackets.

[sierra-nevada.livejournal.com]

But would a business or a consumer have bought that tennis racket?

I hear you saying that that the same number of dollars are running around. I agree.

I am saying that how the dollars are spent at the end of the day matters, i.e. what are the results of the expenditure, and I am suggesting that the dollars are better spent by the B and C components of GDP, rather than G.

[wotw]

First, and of only tangential interest: You cannot possibly
know whether the dollars are better spent privately or by
the government because I haven't said a word about how the
government plans to use that tennis racket.

Second, and to the main point: You've now completely
contradicted yourself. You say that "how the dollars are
spent at the end of the day" is what matters. That's
exactly correct. But earlier, you said that it matters
whether the dollars are raised through taxes or borrowing,
which is exactly wrong. All that matters at the end of
the day is how the dollars are spent.

[sierra-nevada.livejournal.com]

I wrote:

There is also a question of efficient/optimal allocation of capital. At any given moment, there is a finite amount of money. Who does a better job of spending/investing it? Consumers, Businesses, or Government?

I said nothing about how the Government raises money.

I assert that the Government does a poorer job of spending a given dollar, with "best results for the economy as a whole" as the measure, than Businesses or Consumers.

[barking-iguana.livejournal.com]

1. One problem with the debt, as I'm sure you know, is that if it gets high there, is a danger that there will not be the political will to pay it off. That in itself, one could argue, is not a bad thing. Perhaps it would be wise to not pay it off. But the possibility that it will not be paid off at some point in the future leads now to higher interest rates, higher inflation and a myriad of other indirect effects which I suspect or more harmful than not.
2. Much of the financing of the debt comes from outside the country. So much of the debt service becomes money (wealth) leaving the country. So long as the debt is measured in dollars, rather than in a currency under others' control, that probably doesn't matter much. We're investing now in spending that (theoretically) improves life now ans leads to more productivity in the future. But if we can no longer finance the debt in dollars, we become vulnerable to political manipulation by other countries.

[wotw]

So much of the debt service becomes money (wealth)
leaving the country.

No, no, no, no, no, no, no. This really is quite wrong,
and again I want to stress it's wrong as a matter of
arithmetic, not as a matter of politics or ideology.

Look at the apple example above, and feel free to assume
that the credit card issuer is outside the country. You'll
see that at the end of a year, there's $9.90 in your American
bank account if you run a debt, and there's also $9.90 in
your American bank account if you *don't* run a debt.

The amount of wealth in the U.S. is quite unaffected by
whether or not foreigners hold U.S. debt.

[barking-iguana.livejournal.com]

So long as the interest rate on the money is no higher than can be obtained within this country, you're right. But it sure seems to me that if we ever borrow in other currencies (or gold, or whatever) that our effective interest rate could be raised by other countries influencing the exchange rates.

[whitebird.livejournal.com]

Erm.

If an American buys a treasury bond, then an American gets the interest payments, and an American gets the money back from the treasury when the bond matures or is redeemed.

If a Chinese person buys a US treasury bond, then a Chinese person gets the interest payments, and a Chinese person receives money from the US treasure when the bond matures or is redeemed.

A lot of US debt is now owned by foreign countries, and that puts our currency in danger if they choose to redeem that debt in one big hunk.

[wotw]

If an American buys a one dollar Treasury bond, then some
other American pays one dollar less in current taxes and
earns interest on a dollar in his bank account.

If a Chinese person buys a one dollar Treasury bond, then
an American pays one dollar less in current taxes and earns
interest on a dollar in his bank account.

You are looking at the interest payments being sent to
China but failing to look at the additional interest being
earned by U.S. taxpayers, which offsets that flow.

If you don't believe me, work through the apple example
again.

[hammercock.livejournal.com]

*nodnodnod* Well, there's a reason some people say that Clinton was the best Republican president we've had in decades. :-}

But yeah, the Presidents Bush and Reagan made such a mockery of conservative economic principles that I'm amazed any of them got a second chance. 'Cause, you know, spending money you don't have is so much more moral than taxing and spending. :-b