RE: Debt reduction also creates fiscal space

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

See my comments below.

> -----Original Message-----
> From:	sawicky@xxxxxxxxxx [SMTP:sawicky@xxxxxxxxxx]
> Sent:	Friday, February 11, 2000 7:01 PM
> To:	POST-KEYNESIAN THOUGHT
> Subject:	RE: Debt reduction also creates fiscal space
>
>
> . . . However, a persistently large deficit leading to growing debt,
> especially when the deficit is structural (not cyclical) . . .
>
> Deficit?  What deficit?
>
> The projections are for surpluses for the next 50 years,
> under current policies, even if discretionary spending
> in the budget grows with inflation and all current
> benefits under Social Security and Medicare are paid.
>
	[Clifford Poirot]
	Sorry. I should have been more specific. What I meant was that the
Deficits of the 1980's, and to a lesser extent of the '60's and '70's had
led to a large level of debt, and consequently, debt service. 13% of our
current total spending is on paying interest on the national debt, and that
13% includes the Social Security portion of the budget. So out of the
general revenue part of the budget, roughly 30% is going to pay *interest
alone* on the debt. Notably, this debt was accumulated due to the structural
deficits of the 1980's and early 1990's. By eliminating the structural
deficit and beginning to pay down the debt, we allow the possibility for
lower interest rates and prudent leaning against the wind policy when we
need  it.

	I am extremely skeptical about the current budget projections. One
recent analysis I saw (the source was a Paul Krugman column) is that the
surplus projections only work if per person spending in real terms actually
decreases over the period. Assuming we want to at leas maintain current per
person spending levels in *real terms* we will have to increase nominal
expenditures by a considerable amount. This suggests that Bush's tax
proposals are nothing short of absolute recklessness, designed, to in
essence, wreck the welfare state and force large cuts in spending.


> Isn't that "structural" enough?
	[Clifford Poirot]
	see above

> As for accumulating fiscal space, it should be noted
> that the "Treasury view" is back, albeit in modern
> guise, among the guys in charge.  It's not clear if
> fiscal space opens up without much more of a ruckus
> than ought to be necessary.
>
	[Clifford Poirot]
	If by "Treasury View" you mean that of Lloyd George in 1920's
England, nothing could be further from what I am advocating. For one, I am
not advocating maintaining some pre WWI Gold Standard parity, or even trying
fix exchange rates. To the contrary, I am arguing that at present, the
expansion can be maintained by a prudent fiscal stance and a neutral
monetary policy that does not attempt to choke off growth by jacking up
interest rates. When, not "if" the next recession hits, this leaves ample
rook for both fiscal and monetary loosening. My position is a lot closer to
Keynes' position than to Lloyd George's.

	
> Summers may try to pretend he is reloading the fiscal
> cannon, but I fear there's no iron in there, just
> fodder.
	[Clifford Poirot]
	This is the *real* issue, IMHO-the policy priorities of Greenspan
and Summers. Nonetheless, recreating a deficit, when we are at something
coming close to full employment-which would be the impact of the Republican
tax cuts-will leave us with no cannon.

> mbs
>
>
> Here is a rough analogy. If I borrow to buy a house, that is constructive
> borrowing. If I run up my credit card eating at the most expensive
> restaurants, my future consumption will be harmed. In the 1980's, we ran
> up
> the nation's credit card. Now, in the 90's and 00's we pay for this in the
> current tight fiscal policy. We are made better off by the current tight
> fiscal policy because we are accumulating space to use intelligent leaning
> against the wind policy in the next recession, while eliminating debt.
>
> > -----Original Message-----
> > From:	sawicky@xxxxxxxxxx [SMTP:sawicky@xxxxxxxxxx]
> > Sent:	Friday, February 11, 2000 2:31 PM
> > To:	POST-KEYNESIAN THOUGHT
> > Subject:	RE: Debt reduction also creates fiscal space