Re: Debt reduction also creates fiscal space

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Clifford,

Leaving aside the issue of moral values, it is not clear from historical data in
the past 7 decades, that "paying high levels of debt service reduces the amount
of money available for social expenditures-as does a permanently high level of
military spending."

This was true in clasical economics, before the advent of Keynesiansm which can
be summed up as being built around the idea of deficit financing.
There is much technical data to substantiate military Keynesianism.
Public debt enlarges money supply which in turn enlarges the economy.  Under
certain sistuations, the expansion of public debt will provide sufficient growth
to offset debt service drag.  Some of these conditions are: low inflation,
continuing existence of involuntary unemployment, excessive polarization of
wealth and purchasing power (room for reditributive efficiency by broadening the
market), a below par social reinvestment rate, etc.

There is ample evidence that the record of 8 years of the Clinton Administration
has not scare very high on these areas.
For example, Humphrey-Hawkins structural unemployment being set at 4% can be set
to zero. Even NAIRU must be by now below 4%.
Fiscal spending can be a leading growth factor in the economy, a point that PKT
supports.

A case can be made that debt reduction can in fact bring about the recession
that the CEA claims is avoidable with sound fiscal policy.
We are now in an economy very different, almost diametrically so, from the end
of the Reagon/Bush economy.

PKT would argue that instead of debt reduction, the surplus should be used to
redefine the "proper" mix of public investment in the economy, such as free
higher education, health care, child care, etc.
Perhaps the time has come for the US to embrace socialism in order to save
capitalism.
Perhaps we have enetered an era in which social spending is not just morally
sound, but also technically indispensable.
This is a point that so-called Third Way progressives miss.

Henry

Clifford Poirot wrote:

> Henry, you make some interesting points below. I'll concede a few specifics.
> The point I am trying to get at, and I hope I clarified this further in my
> reply to Janet, is that a deficit and consequent debt, whether at the
> household level, or the public level, that is focused on immediate
> consumption rather than on overall investment, requires somebody to pay it
> back down the road. Worse yet, it gets paid back without the benefit of
> higher earnings. So yes, if I take a business client to dinner, that is
> possibly an intelligent expenditure for my credit card.
>
> Notably, paying high levels of debt service reduces the amount of money
> available for social expenditures-as does a permanently high level of
> military spending. It is the budget priorities we should be focused
> on-IMHO-not at present, the current overall level of spending. There is also
> the added constraint that presently, there is no political support for
> expanding spending.
>
> > -----Original Message-----
> > From: ÁÎ×Ó¹â HenryC.K.Liu  ¹ù¤l¥ú [SMTP:hliu@xxxxxxxxxxxxxx]
> > Sent: Friday, February 11, 2000 9:47 PM
> > To:   POST-KEYNESIAN THOUGHT
> > Subject:      Re: Debt reduction also creates fiscal space
> >
> >
> >
> > Clifford Poirot wrote:
> >
> > > Here is a rough analogy. If I borrow to buy a house, that is
> > constructive
> > > borrowing.
> >
> > Not if the house is bigger than you need.
> >
> > > If I run up my credit card eating at the most expensive
> > > restaurants, my future consumption will be harmed.
> >
> > Not if you do business entertaining.
> >
> > > In the 1980's, we ran up the nation's credit card.
> >
> > The question is not the debt, its is how the debt was used, as you
> > suggest.
> >
> > > 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.
> > >
> >
> > But the CEA said there isn't going to be a next recession, while recent
> > fical
> > tightness had exacerbated social polarization.  Would America be better
> > off by
> > not running a surplus and increase government spending on health,
> > education,
> > etc. or to bring unemployment from the so-called structural bottom of 4%
> > to
> > zero?
> >
> > In reality, doesn't debt reduction destroys fiscal space?
> >
> > Henry C.K. Liu